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Investors are always looking for growth in small-cap stocks like Goodbaby International Holdings Limited (HKG:1086), with a market cap of HK$2.7b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into 1086 here.
1086’s Debt (And Cash Flows)
1086's debt level has been constant at around HK$2.8b over the previous year which accounts for long term debt. At this constant level of debt, 1086's cash and short-term investments stands at HK$930m , ready to be used for running the business. Additionally, 1086 has produced cash from operations of HK$432m during the same period of time, resulting in an operating cash to total debt ratio of 16%, signalling that 1086’s current level of operating cash is not high enough to cover debt.
Can 1086 pay its short-term liabilities?
Looking at 1086’s HK$3.1b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Leisure companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can 1086 service its debt comfortably?
1086 is a relatively highly levered company with a debt-to-equity of 56%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if 1086’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 1086, the ratio of 1.91x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
1086’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 1086's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how 1086 has been performing in the past. I suggest you continue to research Goodbaby International Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1086’s future growth? Take a look at our free research report of analyst consensus for 1086’s outlook.
- Valuation: What is 1086 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1086 is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.