Gold Peak Industries (Holdings) Limited (HKG:40) is a small-cap stock with a market capitalization of HK$690.53m. 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, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 40 here.
How much cash does 40 generate through its operations?
40 has built up its total debt levels in the last twelve months, from HK$2.12b to HK$0 – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$1.06b for investing into the business. Additionally, 40 has generated cash from operations of HK$32.85m during the same period of time, resulting in an operating cash to total debt ratio of 1.41%, meaning that 40’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 40’s case, it is able to generate 0.014x cash from its debt capital.
Does 40’s liquid assets cover its short-term commitments?
Looking at 40’s most recent HK$2.78b liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.11x. Generally, for Electronic companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is 40’s debt level acceptable?40 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. 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 0.7x 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.
At its current level of cash flow coverage, 40 has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 40 has been performing in the past. I recommend you continue to research Gold Peak Industries (Holdings) to get a better picture 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.