What Investors Should Know About Asia Orient Holdings Limited's (HKG:214) Financial Strength

Simply Wall St

Tue, Jun 4, 2019, 11:44 PM

While small-cap stocks, such as Asia Orient Holdings Limited (HKG:214) with its market cap of HK$1.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 214 here.

214’s Debt (And Cash Flows)

214's debt levels surged from HK$11b to HK$16b over the last 12 months , which includes long-term debt. With this increase in debt, 214 currently has HK$15b remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 214’s operating efficiency ratios such as ROA here.

Can 214 pay its short-term liabilities?

With current liabilities at HK$5.7b, the company has been able to meet these commitments with a current assets level of HK$18b, leading to a 3.11x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.

Is 214’s debt level acceptable?

With a debt-to-equity ratio of 71%, 214 can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 214's case, the ratio of 3.73x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 214’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although 214’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how 214 has been performing in the past. I recommend you continue to research Asia Orient Holdings to get a more holistic view of the small-cap by looking at: