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Glory Mark Hi-Tech (Holdings) Limited (HKG:8159), 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 8159 will have to follow strict debt obligations which will reduce its financial flexibility. While 8159 has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess 8159’s financial health.
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Does 8159’s growth rate justify its decision for 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. 8159’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. 8159’s revenue growth over the past year is a single-digit 0.9% which is relatively low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can 8159 meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Glory Mark Hi-Tech (Holdings) has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at 8159’s most recent HK$136.0m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$155.2m, with a current ratio of 1.14x. Generally, for Electronic companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Next Steps:
Having no debt on the books means 8159 has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around 8159’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how 8159 has been performing in the past. You should continue to research Glory Mark Hi-Tech (Holdings) to get a better picture of the stock by looking at: