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While small-cap stocks, such as South China Holdings Company Limited (HKG:413) with its market cap of HK$2.6b, 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 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. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into 413 here.
How much cash does 413 generate through its operations?
Over the past year, 413 has maintained its debt levels at around HK$4.4b – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at HK$568m , ready to deploy into the business. Additionally, 413 has produced cash from operations of HK$60m in the last twelve months, resulting in an operating cash to total debt ratio of 1.4%, indicating that 413’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 413’s case, it is able to generate 0.014x cash from its debt capital.
Can 413 pay its short-term liabilities?
At the current liabilities level of HK$3.8b, the company has been able to meet these commitments with a current assets level of HK$4.9b, leading to a 1.3x current account ratio. For Leisure 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.
Can 413 service its debt comfortably?
With a debt-to-equity ratio of 72%, 413 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.
Next Steps:
Although 413’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 413’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how 413 has been performing in the past. I suggest you continue to research South China Holdings to get a better picture of the small-cap by looking at:
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Future Outlook: What are well-informed industry analysts predicting for 413’s future growth? Take a look at our free research report of analyst consensus for 413’s outlook.
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Valuation: What is 413 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 413 is currently mispriced by the market.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.