Hospital Corporation of China Limited (HKG:3869) is a small-cap stock with a market capitalization of HK$2.3b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Healthcare industry, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 3869 here.
How much cash does 3869 generate through its operations?
In the previous 12 months, 3869’s rose by about CN¥701m – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at CN¥410m , ready to deploy into the business. Moreover, 3869 has produced cash from operations of CN¥49m over the same time period, resulting in an operating cash to total debt ratio of 7.0%, signalling that 3869’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In 3869’s case, it is able to generate 0.07x cash from its debt capital.
Can 3869 pay its short-term liabilities?
With current liabilities at CN¥232m, the company has been able to meet these obligations given the level of current assets of CN¥545m, with a current ratio of 2.35x. Generally, for Healthcare companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 3869 face the risk of succumbing to its debt-load?
3869’s level of debt is appropriate relative to its total equity, at 40%. 3869 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for 3869, and the company also has the ability and headroom to increase debt if needed going forward.
3869’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how 3869 has been performing in the past. I suggest you continue to research Hospital of China to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 3869’s future growth? Take a look at our free research report of analyst consensus for 3869’s outlook.
- Valuation: What is 3869 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 3869 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.