Tomson Group Limited (HKG:258) is a small-cap stock with a market capitalization of HK$4.6b. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into 258 here.
How much cash does 258 generate through its operations?
258’s debt level has been constant at around HK$1.5b over the previous year – this includes both the current and long-term debt. At this current level of debt, 258 currently has HK$4.1b remaining in cash and short-term investments for investing into the business. On top of this, 258 has generated cash from operations of HK$593m over the same time period, resulting in an operating cash to total debt ratio of 39%, indicating that 258’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 258’s case, it is able to generate 0.39x cash from its debt capital.
Does 258’s liquid assets cover its short-term commitments?
With current liabilities at HK$6.2b, it seems that the business has been able to meet these commitments with a current assets level of HK$11.4b, leading to a 1.84x current account ratio. For Real Estate companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 258 service its debt comfortably?
With a debt-to-equity ratio of 11%, 258’s debt level may be seen as prudent. 258 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders.
258’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, 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 258 has been performing in the past. I recommend you continue to research Tomson Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 258’s future growth? Take a look at our free research report of analyst consensus for 258’s outlook.
- Valuation: What is 258 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 258 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 firstname.lastname@example.org.