While small-cap stocks, such as COSCO SHIPPING Ports Limited (HKG:1199) with its market cap of HK$28b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 1199 here.
Does 1199 Produce Much Cash Relative To Its Debt?
1199’s debt level has been constant at around US$2.7b over the previous year which accounts for long term debt. At this constant level of debt, 1199’s cash and short-term investments stands at US$552m to keep the business going. On top of this, 1199 has produced US$266m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 9.9%, indicating that 1199’s debt is not covered by operating cash.
Can 1199 meet its short-term obligations with the cash in hand?
With current liabilities at US$781m, it appears that the company has been able to meet these obligations given the level of current assets of US$856m, with a current ratio of 1.1x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Infrastructure companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 1199’s debt level acceptable?
With debt reaching 46% of equity, 1199 may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1199’s case, the ratio of 3.36x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 1199 ample headroom to grow its debt facilities.
1199’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 1199’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 1199’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research COSCO SHIPPING Ports to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1199’s future growth? Take a look at our free research report of analyst consensus for 1199’s outlook.
- Valuation: What is 1199 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 1199 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.
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