What Is Vanke Property (Overseas) Limited's (HKG:1036) Financial Position?

Zero-debt allows substantial financial flexibility, especially for small-cap companies like Vanke Property (Overseas) Limited (SEHK:1036), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean 1036 has outstanding financial strength. I will go over a basic overview of the stock's financial health, which I believe provides a ballpark project of their financial health status. Check out our latest analysis for Vanke Property (Overseas)

Is financial flexibility worth the lower cost of capital?

Debt capital generally has lower cost of capital compared to equity funding. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. 1036’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. 1036’s revenue growth over the past year is a single-digit 2.44% which is relatively low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.

Can 1036 meet its short-term obligations with the cash in hand?

Given zero long-term debt on its balance sheet, Vanke Property (Overseas) has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at HK$30.87M, the company has been able to meet these commitments with a current assets level of HK$734.87M, leading to a 23.8x current account ratio. Though, anything about 3x may be excessive, since 1036 may be leaving too much capital in low-earning investments.

Next Steps:

As 1036's revenues are not growing at a fast enough pace, not taking advantage of lower cost debt may not be the best strategy. As shareholders, you should try and determine whether this strategy is justified for 1036, and whether the company needs financial flexibility at this point in time. This is only a rough assessment of financial health, and I'm sure 1036 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Vanke Property (Overseas) to get a better picture of the stock by looking at:

• 1. Historical Performance: What has 1036'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.
• 2. 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.