Investors are always looking for growth in small-cap stocks like Dream International Limited (SEHK:1126), with a market cap of HK$2.15B. 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into 1126 here.
Does 1126 generate enough cash through operations?
1126’s debt levels surged from HK$3.9M to HK$23.3M over the last 12 months , which is mainly comprised of near term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$424.6M , ready to deploy into the business. Additionally, 1126 has generated HK$347.6M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 14.95x, signalling that 1126’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1126’s case, it is able to generate 14.95x cash from its debt capital.
Does 1126’s liquid assets cover its short-term commitments?
With current liabilities at HK$381.9M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$1,014.7M, with a current ratio of 2.66x. For leisure companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 1126’s level of debt at an acceptable level?
1126’s level of debt is low relative to its total equity, at 3.31%. This range is considered safe as 1126 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
Next Steps:
Are you a shareholder? 1126’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, 1126’s financial situation may change. You should always be keeping on top of market expectations for 1126’s future growth on our free analysis platform.
Are you a potential investor? 1126’s relatively safe debt levels is even more impressive due to its ability to generate high cash flow, which illustrates operating efficiency. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your confidence in the stock, you need to further examine 1126’s track record. You should continue your analysis by taking a look at 1126’s past performance analysis on our free platform to figure out 1126’s financial health position.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.