Gold Peak Industries (Holdings) Limited (HKG:40) is a small-cap stock with a market capitalization of HK$659.14m. 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? Electronic companies, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 40 here.
How does 40’s operating cash flow stack up against its debt?
Over the past year, 40 has ramped up its debt from HK$2.34b to HK$3.05b , which comprises of short- and long-term debt. With this growth in debt, 40 currently has HK$1.21b remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 40’s operating efficiency ratios such as ROA here.
Can 40 pay its short-term liabilities?
With current liabilities at HK$3.69b, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.98x, which is below the prudent industry ratio of 3x.
Is 40’s debt level acceptable?40 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 40’s case, the ratio of 0.24x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 40’s low interest coverage already puts the company at higher risk of default.
40’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for 40’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Gold Peak Industries (Holdings) to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 40’s future growth? Take a look at our free research report of analyst consensus for 40’s outlook.
- Historical Performance: What has 40’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.
- 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.