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China Overseas Property Holdings Limited (HKG:2669), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is 2669 will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean 2669 has outstanding financial strength. I recommend you look at the following hurdles to assess 2669’s financial health.
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Is 2669 growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. Either 2669 does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. A single-digit revenue growth of 1.1% for 2669 is considerably low for a small-cap company. More capital can help the business grow faster. If 2669 is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can 2669 meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, China Overseas Property Holdings has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at HK$2.3b, it appears that the company has been able to meet these obligations given the level of current assets of HK$3.1b, with a current ratio of 1.33x. Usually, for Real Estate companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
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2669 is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, 2669’s financial situation may change. This is only a rough assessment of financial health, and I’m sure 2669 has company-specific issues impacting its capital structure decisions. You should continue to research China Overseas Property Holdings to get a better picture of the stock by looking at: