Why Haw Par Corporation Limited (SGX:H02) Is A Financially Healthy Company

Simply Wall St

Tue, Jun 4, 2019, 9:26 PM

Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Haw Par Corporation Limited (SGX:H02), with a market cap of S$2.9b, often get neglected by retail investors. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. H02’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Don’t forget that this is a general and concentrated examination of Haw Par's financial health, so you should conduct further analysis into H02 here.

Check out our latest analysis for Haw Par

H02’s Debt (And Cash Flows)

Over the past year, H02 has maintained its debt levels at around S$23m . At this stable level of debt, H02 currently has S$530m remaining in cash and short-term investments to keep the business going. Additionally, H02 has generated cash from operations of S$65m over the same time period, leading to an operating cash to total debt ratio of 281%, signalling that H02’s debt is appropriately covered by operating cash.

Does H02’s liquid assets cover its short-term commitments?

At the current liabilities level of S$101m, it seems that the business has been able to meet these obligations given the level of current assets of S$608m, with a current ratio of 6x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.

Does H02 face the risk of succumbing to its debt-load?

Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For Haw Par, investors should not worry about its debt levels because the company has very, very little on its balance sheet! It has been operating its business with miniscule debt and utilising only its equity capital. Investors' risk associated with debt is virtually non-existent with H02, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

H02 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 exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how H02 has been performing in the past. You should continue to research Haw Par to get a more holistic view of the stock by looking at: