While small-cap stocks, such as Sanroc International Holdings Limited (SEHK:1660) with its market cap of HK$8.40B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into 1660 here.
Does 1660 generate enough cash through operations?
1660 has built up its total debt levels in the last twelve months, from HK$57.01M to HK$62.53M made up of predominantly near term debt. With this growth in debt, 1660’s cash and short-term investments stands at HK$137.73M for investing into the business. Moreover, 1660 has produced cash from operations of HK$35.80M during the same period of time, resulting in an operating cash to total debt ratio of 57.25%, indicating that 1660’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1660’s case, it is able to generate 0.57x cash from its debt capital.
Does 1660’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$92.77M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.24x. Usually, for Trade Distributors companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 1660’s debt level acceptable?With debt at 25.05% of equity, 1660 may be thought of as appropriately levered. This range is considered safe as 1660 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 1660 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1660’s, case, the ratio of 30.84x suggests that interest is comfortably 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.
1660 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 1660 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Sanroc International Holdings to get a better picture of the stock by looking at:
- Historical Performance: What has 1660’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.