In This Article:
Tesson Holdings Limited (HKG:1201) is a small-cap stock with a market capitalization of HK$1.1b. 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? Evaluating financial health as part of your investment thesis is essential, 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, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 1201 here.
How does 1201’s operating cash flow stack up against its debt?
Over the past year, 1201 has reduced its debt from HK$440m to HK$244m , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at HK$24m , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 1201’s operating efficiency ratios such as ROA here.
Can 1201 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$412m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.75x. For Packaging companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is 1201’s debt level acceptable?
1201’s level of debt is appropriate relative to its total equity, at 17%. 1201 is not taking on too much debt commitment, which may be constraining for future growth.
Next Steps:
1201 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, 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 1201 has been performing in the past. I recommend you continue to research Tesson Holdings to get a better picture of the stock by looking at:
-
Future Outlook: What are well-informed industry analysts predicting for 1201’s future growth? Take a look at our free research report of analyst consensus for 1201’s outlook.
-
Historical Performance: What has 1201’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
-
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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.