While small-cap stocks, such as Hong Leong Asia Ltd (SGX:H22) with its market cap of SGD392.60M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that H22 is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into H22 here.
Does H22 generate enough cash through operations?
H22 has shrunken its total debt levels in the last twelve months, from SGD987.6M to SGD704.9M , which is made up of current and long term debt. With this debt repayment, H22 currently has SGD1,036.2M remaining in cash and short-term investments , ready to deploy into the business. Moreover, H22 has generated SGD454.1M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 0.64x, meaning that H22’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In H22’s case, it is able to generate 0.64x cash from its debt capital.
Can H22 pay its short-term liabilities?
At the current liabilities level of SGD2,350.1M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.41x. Generally, for machinery companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does H22 face the risk of succumbing to its debt-load?
H22 is a relatively highly levered company with a debt-to-equity of 46.48%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since H22 is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? H22’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. You should always be keeping on top of market expectations for H22’s future growth on our free analysis platform.