Investors are always looking for growth in small-cap stocks like Southeast Asia Properties & Finance Limited (HKG:252), with a market cap of HK$955.78m. However, an important fact which most ignore is: how financially healthy is the business? 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. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 252 here.
Does 252 produce enough cash relative to debt?
Over the past year, 252 has reduced its debt from HK$331.57m to HK$286.31m , which is made up of current and long term debt. With this debt repayment, 252 currently has HK$120.80m remaining in cash and short-term investments , ready to deploy into the business. Additionally, 252 has generated cash from operations of HK$57.69m during the same period of time, leading to an operating cash to total debt ratio of 20.15%, signalling that 252’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 252’s case, it is able to generate 0.2x cash from its debt capital.
Does 252’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$272.34m liabilities, the company has been able to meet these obligations given the level of current assets of HK$576.15m, with a current ratio of 2.12x. For Packaging companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 252 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 22.03%, 252’s debt level may be seen as prudent. 252 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if 252’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 252, the ratio of 6.65x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 252 ample headroom to grow its debt facilities.
Next Steps:
Although 252’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how 252 has been performing in the past. You should continue to research Southeast Asia Properties & Finance to get a more holistic view of the stock by looking at: