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Investors are always looking for growth in small-cap stocks like Hong Leong Asia Ltd (SGX:H22), with a market cap of S$211.3m. However, an important fact which most ignore is: how financially healthy is the business? Since H22 is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into H22 here.
Does H22 produce enough cash relative to debt?
Over the past year, H22 has maintained its debt levels at around S$874.3m – this includes both the current and long-term debt. At this constant level of debt, H22’s cash and short-term investments stands at S$1.43b , ready to deploy into the business. Moreover, H22 has generated cash from operations of S$242.6m in the last twelve months, resulting in an operating cash to total debt ratio of 27.7%, signalling that H22’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In H22’s case, it is able to generate 0.28x cash from its debt capital.
Does H22’s liquid assets cover its short-term commitments?
With current liabilities at S$2.54b, it seems that the business has been able to meet these obligations given the level of current assets of S$3.81b, with a current ratio of 1.5x. Usually, for Machinery companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can H22 service its debt comfortably?
With a debt-to-equity ratio of 42.3%, H22 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since H22 is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
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H22’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 H22’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for H22’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Hong Leong Asia to get a more holistic view of the small-cap by looking at: