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Investors are always looking for growth in small-cap stocks like Leeport (Holdings) Limited (HKG:387), with a market cap of HK$237m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into 387 here.
How much cash does 387 generate through its operations?
387’s debt level has been constant at around HK$145m over the previous year – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at HK$261m for investing into the business. Additionally, 387 has produced HK$64m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 44%, signalling that 387’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 387’s case, it is able to generate 0.44x cash from its debt capital.
Can 387 meet its short-term obligations with the cash in hand?
Looking at 387’s most recent HK$405m liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$529m, leading to a 1.31x current account ratio. For Trade Distributors companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 387 service its debt comfortably?
With debt at 27% of equity, 387 may be thought of as appropriately levered. This range is considered safe as 387 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 387 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 387’s, case, the ratio of 8.22x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 387 ample headroom to grow its debt facilities.
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387’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 387’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Leeport (Holdings) to get a more holistic view of the stock by looking at: