Investors are always looking for growth in small-cap stocks like Hotel Properties Limited (SGX:H15), with a market cap of SGD1.95B. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into H15 here.
Does H15 generate enough cash through operations?
Over the past year, H15 has reduced its debt from SGD1,078.6M to SGD992.3M , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at SGD118.0M for investing into the business. Additionally, H15 has produced SGD141.1M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.14x, signalling that H15’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In H15’s case, it is able to generate 0.14x cash from its debt capital.
Can H15 pay its short-term liabilities?
Looking at H15’s most recent SGD426.6M liabilities, the company has been able to meet these obligations given the level of current assets of SGD578.2M, with a current ratio of 1.36x. Usually, for hospitality companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does H15 face the risk of succumbing to its debt-load?
H15 is a relatively highly levered company with a debt-to-equity of 54.01%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether H15 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In H15’s, case, the ratio of 4.15x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Are you a shareholder? H15’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around H15’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, H15’s financial situation may change. You should always be keeping on top of market expectations for H15’s future growth on our free analysis platform.