In This Article:
Investors are always looking for growth in small-cap stocks like Samson Paper Holdings Limited (HKG:731), with a market cap of HK$571m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, 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. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 731 here.
Does 731 produce enough cash relative to debt?
731 has built up its total debt levels in the last twelve months, from HK$2.1b to HK$2.5b – this includes long-term debt. With this rise in debt, 731 currently has HK$388m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 assess some of 731’s operating efficiency ratios such as ROA here.
Does 731’s liquid assets cover its short-term commitments?
Looking at 731’s HK$3.2b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$3.5b, leading to a 1.12x current account ratio. For Trade Distributors companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 731 face the risk of succumbing to its debt-load?
731 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if 731’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 731, the ratio of 2.63x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 731’s low interest coverage already puts the company at higher risk of default.
Next Steps:
731’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 731’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 731’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Samson Paper Holdings to get a better picture of the small-cap by looking at: