Is Sichuan Expressway Company Limited’s (HKG:107) Balance Sheet A Threat To Its Future?

Lee Kay

Wed, Feb 13, 2019, 8:19 PM

Sichuan Expressway Company Limited (HKG:107) is a small-cap stock with a market capitalization of HK$11b. 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? So, understanding the company’s financial health becomes crucial, 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. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into 107 here.

How much cash does 107 generate through its operations?

Over the past year, 107 has maintained its debt levels at around CN¥18b – this includes long-term debt. At this current level of debt, 107’s cash and short-term investments stands at CN¥3.6b , ready to deploy into the business. On top of this, 107 has generated CN¥2.2b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 12%, signalling that 107’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 107’s case, it is able to generate 0.12x cash from its debt capital.

Can 107 meet its short-term obligations with the cash in hand?

At the current liabilities level of CN¥4.5b, the company has been able to meet these commitments with a current assets level of CN¥7.5b, leading to a 1.67x current account ratio. Usually, for Infrastructure companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

SEHK:107 Historical Debt February 14th 19

Does 107 face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, 107 is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 107’s case, the ratio of 3.14x 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.