While small-cap stocks, such as San Miguel Brewery Hong Kong Limited (HKG:236) with its market cap of HK$467m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, 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. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 236 here.
How does 236’s operating cash flow stack up against its debt?
236 has shrunken its total debt levels in the last twelve months, from HK$192m to HK$142m – this includes long-term debt. With this debt repayment, 236’s cash and short-term investments stands at HK$146m for investing into the business. Moreover, 236 has produced cash from operations of HK$43m over the same time period, leading to an operating cash to total debt ratio of 30%, meaning that 236’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 236’s case, it is able to generate 0.3x cash from its debt capital.
Can 236 meet its short-term obligations with the cash in hand?
Looking at 236’s HK$156m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$262m, with a current ratio of 1.68x. For Beverage companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 236 service its debt comfortably?
236’s level of debt is appropriate relative to its total equity, at 24%. This range is considered safe as 236 is not taking on too much debt obligation, which may be constraining for future growth. We can test if 236’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 236, the ratio of 3.47x suggests that interest is appropriately 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.
236 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 236 has company-specific issues impacting its capital structure decisions. I recommend you continue to research San Miguel Brewery Hong Kong to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 236’s future growth? Take a look at our free research report of analyst consensus for 236’s outlook.
- Valuation: What is 236 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 236 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.
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