Tianjin Development Holdings Limited (SEHK:882) is a small-cap stock with a market capitalization of HK$3.85B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to 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 recommend you dig deeper yourself into 882 here.
Does 882 generate an acceptable amount of cash through operations?
Over the past year, 882 has reduced its debt from HK$3,076.4M to HK$2,310.9M , which is made up of current and long term debt. With this debt payback, 882’s cash and short-term investments stands at HK$6,415.7M for investing into the business. Additionally, 882 has generated cash from operations of HK$8.8M during the same period of time, leading to an operating cash to total debt ratio of 0x, signalling that 882’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 882’s case, it is able to generate 0x cash from its debt capital.
Does 882’s liquid assets cover its short-term commitments?
With current liabilities at HK$5,306.2M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$9,812.5M, with a current ratio of 1.85x. For integrated utilities 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.
Does 882 face the risk of succumbing to its debt-load?
882’s level of debt is appropriate relative to its total equity, at 16.21%. 882 is not taking on too much debt commitment, which may be constraining for future growth. We can test if 882’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 882, the ratio of 0.29x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
Are you a shareholder? 882’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that 882’s financial situation may change. You should always be keeping on top of market expectations for 882’s future growth on our free analysis platform.