Investors are always looking for growth in small-cap stocks like High Fashion International Limited (HKG:608), with a market cap of HK$556m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into 608 here.
Does 608 produce enough cash relative to debt?
Over the past year, 608 has ramped up its debt from HK$1.3b to HK$1.4b – this includes long-term debt. With this growth in debt, 608 currently has HK$999m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 608’s operating efficiency ratios such as ROA here.
Can 608 meet its short-term obligations with the cash in hand?
Looking at 608’s HK$1.6b in current liabilities, the company has been able to meet these commitments with a current assets level of HK$2.6b, leading to a 1.63x current account ratio. Generally, for Luxury companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 608’s debt level acceptable?
With debt reaching 58% of equity, 608 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
608’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 608’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 608’s financial health. Other important fundamentals need to be considered alongside. You should continue to research High Fashion International to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 608’s future growth? Take a look at our free research report of analyst consensus for 608’s outlook.
- Historical Performance: What has 608’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
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