Is Neway Group Holdings Limited's (HKG:55) Balance Sheet Strong Enough To Weather A Storm?

Investors are always looking for growth in small-cap stocks like Neway Group Holdings Limited (SEHK:55), with a market cap of HK$125.55M. 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 a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 55 here.

Does 55 generate enough cash through operations?

Over the past year, 55 has reduced its debt from HK$73.72M to HK$61.36M , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at HK$448.90M , ready to deploy into the business. On top of this, 55 has generated cash from operations of HK$7.88M over the same time period, resulting in an operating cash to total debt ratio of 12.84%, meaning that 55’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 55’s case, it is able to generate 0.13x cash from its debt capital.

Can 55 pay its short-term liabilities?

At the current liabilities level of HK$185.88M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$757.64M, with a current ratio of 4.08x. However, anything above 3x is considered high and could mean that 55 has too much idle capital in low-earning investments.

Is 55’s debt level acceptable?

55’s level of debt is low relative to its total equity, at 6.08%. This range is considered safe as 55 is not taking on too much debt obligation, which may be constraining for future growth.

Next Steps:

55’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 55's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Neway Group Holdings to get a better picture of the stock by looking at:

1. Valuation: What is 55 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 55 is currently mispriced by the market.
2. Historical Performance: What has 55'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.