How Financially Strong Is Tsit Wing International Holdings Limited (HKG:2119)?

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Investors are always looking for growth in small-cap stocks like Tsit Wing International Holdings Limited (HKG:2119), with a market cap of HK$1.2b. However, an important fact which most ignore is: how financially healthy is the business? Consumer Retailing businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 2119 here.

How much cash does 2119 generate through its operations?

2119’s debt level has been constant at around HK$179m over the previous year including long-term debt. At this constant level of debt, 2119 currently has HK$327m remaining in cash and short-term investments , ready to deploy into the business. Additionally, 2119 has produced HK$45m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 25%, indicating that 2119’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 2119’s case, it is able to generate 0.25x cash from its debt capital.

Can 2119 meet its short-term obligations with the cash in hand?

Looking at 2119’s HK$276m in current liabilities, the company has been able to meet these obligations given the level of current assets of HK$687m, with a current ratio of 2.49x. Usually, for Consumer Retailing companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

SEHK:2119 Historical Debt February 13th 19
SEHK:2119 Historical Debt February 13th 19

Is 2119’s debt level acceptable?

With a debt-to-equity ratio of 35%, 2119’s debt level may be seen as prudent. 2119 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether 2119 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 2119’s, case, the ratio of 14.53x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 2119 ample headroom to grow its debt facilities.

Next Steps:

2119’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 2119 has been performing in the past. You should continue to research Tsit Wing International Holdings to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 2119’s future growth? Take a look at our free research report of analyst consensus for 2119’s outlook.
  2. Valuation: What is 2119 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 2119 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.

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 editorial-team@simplywallst.com.