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While small-cap stocks, such as HNA Infrastructure Company Limited (HKG:357) with its market cap of HK$3.73b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into 357 here.
How much cash does 357 generate through its operations?
357 has built up its total debt levels in the last twelve months, from HK$3.31b to HK$0 , which comprises of short- and long-term debt. With this growth in debt, 357’s cash and short-term investments stands at HK$730.52m , ready to deploy into the business. On top of this, 357 has generated HK$1.06b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 26.26%, signalling that 357’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 357’s case, it is able to generate 0.26x cash from its debt capital.
Can 357 meet its short-term obligations with the cash in hand?
Looking at 357’s most recent HK$1.14b liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$1.17b, leading to a 1.02x current account ratio. Generally, for Infrastructure 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.
Can 357 service its debt comfortably?
357 is a relatively highly levered company with a debt-to-equity of 98.92%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In 357’s case, the ratio of 5.88x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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357’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 357’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 357’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research HNA Infrastructure to get a more holistic view of the small-cap by looking at: