Is Tai Kam Holdings Limited’s (HKG:8321) Balance Sheet A Threat To Its Future?
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Tai Kam Holdings Limited (HKG:8321) is a small-cap stock with a market capitalization of HK$60m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? 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. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into 8321 here.
How does 8321’s operating cash flow stack up against its debt?
In the previous 12 months, 8321’s rose by about HK$13m made up of predominantly near term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$110m for investing into the business. Moreover, 8321 has generated HK$22m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 166%, signalling that 8321’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 8321’s case, it is able to generate 1.66x cash from its debt capital.
Can 8321 pay its short-term liabilities?
Looking at 8321’s HK$41m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$137m, with a current ratio of 3.35x. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Can 8321 service its debt comfortably?
With a debt-to-equity ratio of 13%, 8321’s debt level may be seen as prudent. This range is considered safe as 8321 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 8321’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 8321, the ratio of 179x 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:
8321 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 8321’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Tai Kam Holdings to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 8321’s future growth? Take a look at our free research report of analyst consensus for 8321’s outlook.
Valuation: What is 8321 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 8321 is currently mispriced by the market.
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.
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