Is Wison Engineering Services Co. Ltd. (HKG:2236) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like Wison Engineering Services Co. Ltd. (HKG:2236), with a market cap of HK$4.0b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into 2236 here.

2236’s Debt (And Cash Flows)

2236 has shrunk its total debt levels in the last twelve months, from CN¥491m to CN¥234m , which is mainly comprised of near term debt. With this debt payback, 2236 currently has CN¥608m remaining in cash and short-term investments , ready to be used for running the business. On top of this, 2236 has generated cash from operations of CN¥339m over the same time period, leading to an operating cash to total debt ratio of 145%, meaning that 2236’s current level of operating cash is high enough to cover debt.

Can 2236 meet its short-term obligations with the cash in hand?

At the current liabilities level of CN¥3.9b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.28x. The current ratio is the number you get when you divide current assets by current liabilities. For Energy Services companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

Can 2236 service its debt comfortably?

2236’s level of debt is appropriate relative to its total equity, at 10%. This range is considered safe as 2236 is not taking on too much debt obligation, which may be constraining for future growth. We can test if 2236’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 2236, the ratio of 3.98x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 2236’s high interest coverage is seen as responsible and safe practice.

Next Steps:

2236 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, 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 2236's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Wison Engineering Services to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 2236’s future growth? Take a look at our free research report of analyst consensus for 2236’s outlook.
2. Valuation: What is 2236 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 2236 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.

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