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While small-cap stocks, such as Tristate Holdings Limited (HKG:458) with its market cap of HK$440m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 458 is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 458 here.
How much cash does 458 generate through its operations?
Over the past year, 458 has ramped up its debt from HK$128m to HK$180m , which is mainly comprised of near term debt. With this growth in debt, 458 currently has HK$245m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of 458’s operating efficiency ratios such as ROA here.
Can 458 pay its short-term liabilities?
At the current liabilities level of HK$623m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.93x. Generally, for Luxury companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is 458’s debt level acceptable?
With debt at 15% of equity, 458 may be thought of as appropriately levered. This range is considered safe as 458 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with 458, and the company has plenty of headroom and ability to raise debt should it need to in the future.
458 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 458 has been performing in the past. I recommend you continue to research Tristate Holdings to get a more holistic view of the stock by looking at:
- Historical Performance: What has 458’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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.