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Investors are always looking for growth in small-cap stocks like SRE Group Limited (HKG:1207), with a market cap of HK$2.0b. 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. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into 1207 here.
Does 1207 Produce Much Cash Relative To Its Debt?
1207 has shrunk its total debt levels in the last twelve months, from CN¥8.6b to CN¥7.6b , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at CN¥699m to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can assess some of 1207’s operating efficiency ratios such as ROA here.
Does 1207’s liquid assets cover its short-term commitments?
At the current liabilities level of CN¥8.8b, it seems that the business may not have an easy time meeting these commitments with a current assets level of CN¥8.5b, leading to a current ratio of 0.96x. The current ratio is calculated by dividing current assets by current liabilities.
Can 1207 service its debt comfortably?
With a debt-to-equity ratio of 98%, 1207 can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1207's case, the ratio of 0.69x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
1207’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure 1207 has company-specific issues impacting its capital structure decisions. I recommend you continue to research SRE Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1207’s future growth? Take a look at our free research report of analyst consensus for 1207’s outlook.
- Historical Performance: What has 1207'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 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.