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Investors are always looking for growth in small-cap stocks like Fullshare Holdings Limited (HKG:607), with a market cap of HK$11b. However, an important fact which most ignore is: how financially healthy is the business? Since 607 is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into 607 here.
607’s Debt (And Cash Flows)
607 has shrunk its total debt levels in the last twelve months, from CN¥14b to CN¥13b , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at CN¥10b to keep the business going. Additionally, 607 has generated CN¥209m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 1.6%, meaning that 607’s current level of operating cash is not high enough to cover debt.
Can 607 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥19b, it seems that the business has been able to meet these commitments with a current assets level of CN¥28b, leading to a 1.5x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Electrical companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 607’s debt level acceptable?
With debt reaching 54% of equity, 607 may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since 607 is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
607’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 607's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure 607 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Fullshare Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 607’s future growth? Take a look at our free research report of analyst consensus for 607’s outlook.
- Historical Performance: What has 607'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.
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.