Secoo Holding Limited (NASDAQ:SECO) is a small-cap stock with a market capitalization of US$477m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Online Retail industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into SECO here.
Does SECO produce enough cash relative to debt?
SECO has built up its total debt levels in the last twelve months, from CN¥252m to CN¥275m – this includes both the current and long-term debt. With this increase in debt, SECO’s cash and short-term investments stands at CN¥259m , 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. 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 SECO’s operating efficiency ratios such as ROA here.
Can SECO meet its short-term obligations with the cash in hand?
With current liabilities at CN¥671m, it appears that the company has been able to meet these commitments with a current assets level of CN¥1.9b, leading to a 2.85x current account ratio. For Online Retail 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.
Does SECO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 20%, SECO’s debt level may be seen as prudent. SECO is not taking on too much debt commitment, which may be constraining for future growth. We can test if SECO’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 SECO, the ratio of 16.45x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
SECO’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for SECO’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Secoo Holding to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SECO’s future growth? Take a look at our free research report of analyst consensus for SECO’s outlook.
- Historical Performance: What has SECO’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.