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Wong’s Kong King International (Holdings) Limited (HKG:532) is a small-cap stock with a market capitalization of HK$788m. 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? Electronic companies, even ones that are profitable, are more likely to be 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. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into 532 here.
How much cash does 532 generate through its operations?
532’s debt levels surged from HK$776m to HK$931m over the last 12 months , which is mainly comprised of near term debt. With this growth in debt, 532 currently has HK$756m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 532’s operating efficiency ratios such as ROA here.
Can 532 pay its short-term liabilities?
With current liabilities at HK$2.2b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.48x. Generally, for Electronic 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.
Can 532 service its debt comfortably?
With debt reaching 57% of equity, 532 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if 532’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 532, the ratio of 14.29x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 532’s high interest coverage is seen as responsible and safe practice.
Next Steps:
At its current level of cash flow coverage, 532 has room for improvement to better cushion for events which may require debt repayment. 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 532 has been performing in the past. I suggest you continue to research Wong’s Kong King International (Holdings) to get a better picture of the stock by looking at: