In This Article:
While small-cap stocks, such as Polyfair Holdings Limited (SEHK:8532) with its market cap of HK$162.40M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 8532 here.
How does 8532’s operating cash flow stack up against its debt?
8532 has built up its total debt levels in the last twelve months, from HK$30.67M to HK$48.95M , which is mainly comprised of near term debt. With this increase in debt, 8532 currently has HK$9.47M 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 8532’s operating efficiency ratios such as ROA here.
Does 8532’s liquid assets cover its short-term commitments?
With current liabilities at HK$70.79M, it seems that the business has been able to meet these commitments with a current assets level of HK$89.76M, leading to a 1.27x current account ratio. Generally, for Construction companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 8532 face the risk of succumbing to its debt-load?
With total debt exceeding equities, 8532 is considered a highly levered company. 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 8532’s case, the ratio of 11.93x suggests that interest is comfortably 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.
Next Steps:
8532’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 8532 has been performing in the past. I recommend you continue to research Polyfair Holdings to get a more holistic view of the stock by looking at: