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Investors are always looking for growth in small-cap stocks like Golden Ponder Holdings Limited (HKG:1783), with a market cap of HK$228m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into 1783 here.
Does 1783 produce enough cash relative to debt?
1783’s debt levels have fallen from HK$14m to HK$8.6m over the last 12 months , which is mainly comprised of near term debt. With this reduction in debt, 1783 currently has HK$48m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of 1783’s operating efficiency ratios such as ROA here.
Can 1783 meet its short-term obligations with the cash in hand?
Looking at 1783’s HK$104m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.8x. For Construction companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is 1783’s debt level acceptable?
1783’s level of debt is appropriate relative to its total equity, at 10%. 1783 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether 1783 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1783’s, case, the ratio of 109x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1783 ample headroom to grow its debt facilities.
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1783’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how 1783 has been performing in the past. I suggest you continue to research Golden Ponder Holdings to get a more holistic view of the stock by looking at: