Investors are always looking for growth in small-cap stocks like Asia Satellite Telecommunications Holdings Limited (HKG:1135), with a market cap of HK$2.6b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, 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, this is just a partial view of the stock, and I recommend you dig deeper yourself into 1135 here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Does 1135 Produce Much Cash Relative To Its Debt?
Over the past year, 1135 has reduced its debt from HK$3.0b to HK$2.6b , which also accounts for long term debt. With this debt payback, 1135 currently has HK$566m remaining in cash and short-term investments , ready to be used for running the business. On top of this, 1135 has generated HK$973m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 37%, meaning that 1135’s debt is appropriately covered by operating cash.
Can 1135 pay its short-term liabilities?
With current liabilities at HK$670m, the company has been able to meet these obligations given the level of current assets of HK$804m, with a current ratio of 1.2x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Telecom companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 1135’s debt level acceptable?
With a debt-to-equity ratio of 72%, 1135 can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if 1135’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 1135, the ratio of 6.34x suggests that interest is appropriately 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:
Although 1135’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure 1135 has company-specific issues impacting its capital structure decisions. You should continue to research Asia Satellite Telecommunications Holdings to get a better picture of the small-cap by looking at: