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Investors are always looking for growth in small-cap stocks like Asia Orient Holdings Limited (HKG:214), with a market cap of HK$1.4b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I recommend you dig deeper yourself into 214 here.
Does 214 produce enough cash relative to debt?
214 has built up its total debt levels in the last twelve months, from HK$7.9b to HK$13.3b , which comprises of short- and long-term debt. With this rise in debt, 214 currently has HK$14.4b remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of 214’s operating efficiency ratios such as ROA here.
Can 214 meet its short-term obligations with the cash in hand?
Looking at 214’s most recent HK$3.9b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.13x. Having said that, many consider anything above 3x to be quite high and could mean that 214 has too much idle capital in low-earning investments.
Can 214 service its debt comfortably?
With debt reaching 56% of equity, 214 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 214’s case, the ratio of 4.56x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 214 ample headroom to grow its debt facilities.
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At its current level of cash flow coverage, 214 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 214’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Asia Orient Holdings to get a more holistic view of the stock by looking at: