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While small-cap stocks, such as Overseas Chinese Town (Asia) Holdings Limited (HKG:3366) with its market cap of HK$2.0b, 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 vital, since poor capital management may bring about 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 3366 here.
How does 3366’s operating cash flow stack up against its debt?
3366’s debt levels have fallen from CN¥9.2b to CN¥6.2b over the last 12 months , which is made up of current and long term debt. With this debt repayment, 3366’s cash and short-term investments stands at CN¥4.2b , ready to deploy into the business. Moreover, 3366 has produced cash from operations of CN¥918m in the last twelve months, resulting in an operating cash to total debt ratio of 15%, indicating that 3366’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 3366’s case, it is able to generate 0.15x cash from its debt capital.
Can 3366 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥8.4b, it appears that the company has been able to meet these commitments with a current assets level of CN¥11.1b, leading to a 1.33x current account ratio. Generally, for Real Estate companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 3366 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 48%, 3366 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. 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 3366’s case, the ratio of 8.47x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 3366 ample headroom to grow its debt facilities.
Next Steps:
3366’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. 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 3366’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Overseas Chinese Town (Asia) Holdings to get a better picture of the stock by looking at: