Investors are always looking for growth in small-cap stocks like Wan Kei Group Holdings Limited (HKG:1718), with a market cap of HK$653m. However, an important fact which most ignore is: how financially healthy is the business? Given that 1718 is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into 1718 here.
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Does 1718 Produce Much Cash Relative To Its Debt?
1718 has built up its total debt levels in the last twelve months, from HK$156m to HK$174m . With this increase in debt, the current cash and short-term investment levels stands at HK$398m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 1718’s operating efficiency ratios such as ROA here.
Can 1718 meet its short-term obligations with the cash in hand?
With current liabilities at HK$214m, the company has been able to meet these obligations given the level of current assets of HK$485m, with a current ratio of 2.27x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Construction companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 1718 service its debt comfortably?
1718 is a relatively highly levered company with a debt-to-equity of 60%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since 1718 is presently 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.
1718’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 1718'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 1718 has company-specific issues impacting its capital structure decisions. You should continue to research Wan Kei Group Holdings to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has 1718'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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