Is Affluent Foundation Holdings Limited’s (HKG:1757) Balance Sheet Strong Enough To Weather A Storm?

Investors are always looking for growth in small-cap stocks like Affluent Foundation Holdings Limited (HKG:1757), with a market cap of HK$281m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, 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. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 1757 here.

How much cash does 1757 generate through its operations?

1757 has shrunken its total debt levels in the last twelve months, from HK$29m to HK$20m made up of predominantly near term debt. With this debt payback, 1757’s cash and short-term investments stands at HK$45m 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 1757’s operating efficiency ratios such as ROA here.

Does 1757’s liquid assets cover its short-term commitments?

With current liabilities at HK$78m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.11x. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.

SEHK:1757 Historical Debt, March 6th 2019
SEHK:1757 Historical Debt, March 6th 2019

Does 1757 face the risk of succumbing to its debt-load?

With debt at 11% of equity, 1757 may be thought of as appropriately levered. This range is considered safe as 1757 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 1757 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 1757’s, case, the ratio of 36.16x 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.

Next Steps:

1757’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 1757 has company-specific issues impacting its capital structure decisions. You should continue to research Affluent Foundation Holdings to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 1757’s future growth? Take a look at our free research report of analyst consensus for 1757’s outlook.
  2. Historical Performance: What has 1757’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.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.