While small-cap stocks, such as Build King Holdings Limited (HKG:240) with its market cap of HK$1.0b, 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 240 here.
How does 240’s operating cash flow stack up against its debt?
240 has shrunken its total debt levels in the last twelve months, from HK$438m to HK$410m – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at HK$1.2b for investing into the business. Additionally, 240 has generated HK$605m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 147%, indicating that 240’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 240’s case, it is able to generate 1.47x cash from its debt capital.
Does 240’s liquid assets cover its short-term commitments?
With current liabilities at HK$2.8b, the company has been able to meet these commitments with a current assets level of HK$3.2b, leading to a 1.12x current account ratio. Usually, for Construction companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can 240 service its debt comfortably?
With a debt-to-equity ratio of 53%, 240 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if 240’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 240, the ratio of 58.42x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 240’s high interest coverage is seen as responsible and safe practice.
Although 240’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure 240 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Build King Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 240’s future growth? Take a look at our free research report of analyst consensus for 240’s outlook.
- Valuation: What is 240 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 240 is currently mispriced by the market.
- 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 email@example.com.