Is PC Partner Group Limited's (HKG:1263) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like PC Partner Group Limited (SEHK:1263), with a market cap of HK$2.43B. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Tech industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into 1263 here.

Does 1263 generate an acceptable amount of cash through operations?

1263's debt levels surged from HK$800.47M to HK$987.61M over the last 12 months . With this growth in debt, 1263 currently has HK$804.94M remaining in cash and short-term investments , ready to deploy into the business. On top of this, 1263 has produced cash from operations of HK$19.53M over the same time period, resulting in an operating cash to total debt ratio of 1.98%, indicating that 1263’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1263’s case, it is able to generate 0.02x cash from its debt capital.

Does 1263’s liquid assets cover its short-term commitments?

At the current liabilities level of HK$1.97B liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$2.82B, leading to a 1.43x current account ratio. Usually, for Tech companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can 1263 service its debt comfortably?

1263 is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether 1263 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1263's, case, the ratio of 11.91x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1263 ample headroom to grow its debt facilities.

Next Steps:

1263’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I'm sure 1263 has company-specific issues impacting its capital structure decisions. I suggest you continue to research PC Partner Group to get a more holistic view of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for 1263’s future growth? Take a look at our free research report of analyst consensus for 1263’s outlook.
• 2. Valuation: What is 1263 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 1263 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.

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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.