In This Article:
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Wonderful Sky Financial Group Holdings Limited (HKG:1260) is a small-cap stock with a market capitalization of HK$1.4b. 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. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into 1260 here.
1260’s Debt (And Cash Flows)
1260's debt levels have fallen from HK$730m to HK$349m over the last 12 months , which is mainly comprised of near term debt. With this debt repayment, 1260's cash and short-term investments stands at HK$820m to keep the business going. Moreover, 1260 has generated HK$163m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 47%, signalling that 1260’s current level of operating cash is high enough to cover debt.
Does 1260’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$479m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.26x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Media companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is 1260’s debt level acceptable?
1260’s level of debt is appropriate relative to its total equity, at 25%. This range is considered safe as 1260 is not taking on too much debt obligation, which may be constraining for future growth.
Next Steps:
1260 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate 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 1260 has been performing in the past. You should continue to research Wonderful Sky Financial Group Holdings to get a more holistic view of the stock by looking at:
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Future Outlook: What are well-informed industry analysts predicting for 1260’s future growth? Take a look at our free research report of analyst consensus for 1260’s outlook.
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Historical Performance: What has 1260's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.