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Shun Ho Property Investments Limited (SEHK:219) is a small-cap stock with a market capitalization of HK$1.45B. 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? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 219 here.
Does 219 generate enough cash through operations?
219 has built up its total debt levels in the last twelve months, from HK$561.13M to HK$809.27M – this includes both the current and long-term debt. With this growth in debt, 219’s cash and short-term investments stands at HK$419.61M , ready to deploy into the business. On top of this, 219 has generated HK$282.00M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 34.85%, signalling that 219’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 219’s case, it is able to generate 0.35x cash from its debt capital.
Does 219’s liquid assets cover its short-term commitments?
Looking at 219’s most recent HK$880.24M liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$899.82M, leading to a 1.02x current account ratio. For Hospitality companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can 219 service its debt comfortably?
With debt at 12.67% of equity, 219 may be thought of as appropriately levered. 219 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether 219 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 219’s, case, the ratio of 24.38x suggests that interest is comfortably 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:
219’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. I admit this is a fairly basic analysis for 219’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Shun Ho Property Investments to get a better picture of the stock by looking at: