Are Starrise Media Holdings Limited’s (HKG:1616) Interest Costs Too High?
While small-cap stocks, such as Starrise Media Holdings Limited (HKG:1616) with its market cap of HK$1.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 1616 is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into 1616 here.
Does 1616 produce enough cash relative to debt?
1616’s debt levels surged from CN¥652m to CN¥734m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at CN¥451m for investing into the business. Moreover, 1616 has produced cash from operations of CN¥103m over the same time period, resulting in an operating cash to total debt ratio of 14%, signalling that 1616’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In 1616’s case, it is able to generate 0.14x cash from its debt capital.
Can 1616 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥746m, it seems that the business has been able to meet these obligations given the level of current assets of CN¥1.1b, with a current ratio of 1.45x. Generally, for Luxury companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 1616’s debt level acceptable?
With debt reaching 70% of equity, 1616 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since 1616 is presently loss-making, 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.
Next Steps:
1616’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 1616’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Starrise Media Holdings to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1616’s future growth? Take a look at our free research report of analyst consensus for 1616’s outlook.
Historical Performance: What has 1616’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 editorial-team@simplywallst.com.
