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While small-cap stocks, such as San Miguel Brewery Hong Kong Limited (HKG:236) with its market cap of HK$430m, 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 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. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into 236 here.
Does 236 produce enough cash relative to debt?
Over the past year, 236 has reduced its debt from HK$192m to HK$142m , which is made up of current and long term debt. With this debt repayment, 236 currently has HK$146m remaining in cash and short-term investments , ready to deploy into the business. Moreover, 236 has produced cash from operations of HK$43m in the last twelve months, resulting in an operating cash to total debt ratio of 30%, indicating that 236’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 236’s case, it is able to generate 0.3x cash from its debt capital.
Can 236 meet its short-term obligations with the cash in hand?
Looking at 236’s most recent HK$156m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.68x. Usually, for Beverage companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 236 service its debt comfortably?
With a debt-to-equity ratio of 24%, 236’s debt level may be seen as prudent. 236 is not taking on too much debt commitment, which may be constraining for future growth. We can test if 236’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 236, the ratio of 3.47x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 236’s high interest coverage is seen as responsible and safe practice.
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236’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 236 has been performing in the past. You should continue to research San Miguel Brewery Hong Kong to get a more holistic view of the stock by looking at: