What Does Million Hope Industries Holdings Limited’s (HKG:1897) Balance Sheet Tell Us About It?

Investors are always looking for growth in small-cap stocks like Million Hope Industries Holdings Limited (HKG:1897), with a market cap of HK$77.0. However, an important fact which most ignore is: how financially healthy is the business? 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. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into 1897 here.

1897’s Debt (And Cash Flows)

Over the past year, 1897 has reduced its debt from HK$167m to HK$77m . With this reduction in debt, the current cash and short-term investment levels stands at HK$44m , ready to be used for running the business. Additionally, 1897 has generated cash from operations of HK$5.3m in the last twelve months, leading to an operating cash to total debt ratio of 6.8%, signalling that 1897’s debt is not covered by operating cash.

Can 1897 meet its short-term obligations with the cash in hand?

With current liabilities at HK$178m, it seems that the business has been able to meet these commitments with a current assets level of HK$204m, leading to a 1.15x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Building companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

SEHK:1897 Historical Debt, March 22nd 2019
SEHK:1897 Historical Debt, March 22nd 2019

Is 1897’s debt level acceptable?

With a debt-to-equity ratio of 60%, 1897 can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1897’s case, the ratio of 27.95x 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:

1897’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 1897’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 1897’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Million Hope Industries Holdings to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 1897’s future growth? Take a look at our free research report of analyst consensus for 1897’s outlook.
  2. Valuation: What is 1897 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1897 is currently mispriced by the market.
  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.