In This Article:
Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Investors are always looking for growth in small-cap stocks like Playmates Holdings Limited (HKG:635), with a market cap of HK$2.3b. However, an important fact which most ignore is: how financially healthy is the business? 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 635 here.
How does 635’s operating cash flow stack up against its debt?
635 has built up its total debt levels in the last twelve months, from HK$604m to HK$686m – this includes long-term debt. With this rise in debt, 635’s cash and short-term investments stands at HK$1.7b for investing into the business. Additionally, 635 has generated cash from operations of HK$191m in the last twelve months, leading to an operating cash to total debt ratio of 28%, meaning that 635’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 635’s case, it is able to generate 0.28x cash from its debt capital.
Can 635 pay its short-term liabilities?
With current liabilities at HK$739m, the company has been able to meet these obligations given the level of current assets of HK$1.8b, with a current ratio of 2.43x. For Leisure companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 635’s debt level acceptable?
With debt at 10% of equity, 635 may be thought of as appropriately levered. 635 is not taking on too much debt commitment, which may be constraining for future growth. We can test if 635’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 635, the ratio of 12.94x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 635’s high interest coverage is seen as responsible and safe practice.
Next Steps:
635’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 635’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Playmates Holdings to get a better picture of the stock by looking at: