In This Article:
While small-cap stocks, such as Hop Fung Group Holdings Limited (HKG:2320) with its market cap of HK$394m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes crucial, 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 not a comprehensive overview, so I’d encourage you to dig deeper yourself into 2320 here.
2320’s Debt (And Cash Flows)
Over the past year, 2320 has ramped up its debt from HK$94m to HK$231m – this includes long-term debt. With this growth in debt, 2320’s cash and short-term investments stands at HK$253m , ready to be used for running the business. Additionally, 2320 has generated HK$52m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 23%, signalling that 2320’s current level of operating cash is high enough to cover debt.
Does 2320’s liquid assets cover its short-term commitments?
Looking at 2320’s HK$421m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.74x. The current ratio is the number you get when you divide current assets by current liabilities. For Packaging companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does 2320 face the risk of succumbing to its debt-load?
2320’s level of debt is appropriate relative to its total equity, at 14%. 2320 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether 2320 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 2320’s, case, the ratio of 103x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 2320 ample headroom to grow its debt facilities.
Next Steps:
2320 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 2320 has been performing in the past. You should continue to research Hop Fung Group Holdings to get a more holistic view of the stock by looking at: