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Investors are always looking for growth in small-cap stocks like Win Win Way Construction Holdings Ltd. (HKG:994), with a market cap of HK$838m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 994 here.
Does 994 produce enough cash relative to debt?
994 has built up its total debt levels in the last twelve months, from HK$33m to HK$73m , which is mainly comprised of near term debt. With this growth in debt, 994’s cash and short-term investments stands at HK$208m , ready to deploy 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. For this article’s sake, I won’t be looking at this today, but you can examine some of 994’s operating efficiency ratios such as ROA here.
Does 994’s liquid assets cover its short-term commitments?
With current liabilities at HK$198m, it appears that the company has been able to meet these obligations given the level of current assets of HK$537m, with a current ratio of 2.7x. Generally, for Construction 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.
Is 994’s debt level acceptable?
With debt at 22% of equity, 994 may be thought of as appropriately levered. 994 is not taking on too much debt commitment, which may be constraining for future growth. We can test if 994’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 994, the ratio of 16.41x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 994 ample headroom to grow its debt facilities.
994’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 994’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Win Win Way Construction Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 994’s future growth? Take a look at our free research report of analyst consensus for 994’s outlook.
- Historical Performance: What has 994’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 firstname.lastname@example.org.