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Investors are always looking for growth in small-cap stocks like COSCO SHIPPING Ports Limited (HKG:1199), with a market cap of HK$27b. However, an important fact which most ignore is: how financially healthy is the business? 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, this is just a partial view of the stock, and I suggest you dig deeper yourself into 1199 here.
Does 1199 Produce Much Cash Relative To Its Debt?
1199's debt level has been constant at around US$2.7b over the previous year – this includes long-term debt. At this stable level of debt, 1199's cash and short-term investments stands at US$552m , ready to be used for running the business. Moreover, 1199 has generated US$266m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 9.9%, meaning that 1199’s debt is not covered by operating cash.
Can 1199 pay its short-term liabilities?
With current liabilities at US$781m, it seems that the business has been able to meet these commitments with a current assets level of US$856m, leading to a 1.1x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Infrastructure companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does 1199 face the risk of succumbing to its debt-load?
With debt reaching 46% of equity, 1199 may be thought of as relatively highly levered. 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 1199’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 1199, the ratio of 3.36x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 1199’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although 1199’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 1199's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure 1199 has company-specific issues impacting its capital structure decisions. I suggest you continue to research COSCO SHIPPING Ports to get a better picture of the small-cap by looking at: