Investors are always looking for growth in small-cap stocks like Pentamaster International Limited (SEHK:1665), with a market cap of HK$1.84B. However, an important fact which most ignore is: how financially healthy is the business? Semiconductor companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into 1665 here.
Does 1665 generate enough cash through operations?
1665 has built up its total debt levels in the last twelve months, from RM10.65M to RM14.97M . With this increase in debt, 1665 currently has RM81.64M remaining in cash and short-term investments for investing into the business. On top of this, 1665 has produced RM57.17M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 381.79%, meaning that 1665’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1665’s case, it is able to generate 3.82x cash from its debt capital.
Does 1665’s liquid assets cover its short-term commitments?
Looking at 1665’s most recent RM164.17M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of RM244.15M, with a current ratio of 1.49x. Generally, for Semiconductor companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 1665 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 11.76%, 1665’s debt level may be seen as prudent. This range is considered safe as 1665 is not taking on too much debt obligation, which may be constraining for future growth.
Next Steps:
1665’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 1665 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Pentamaster International to get a more holistic view of the stock by looking at:
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Future Outlook: What are well-informed industry analysts predicting for 1665’s future growth? Take a look at our free research report of analyst consensus for 1665’s outlook.
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Valuation: What is 1665 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1665 is currently mispriced by the market.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.