While small-cap stocks, such as Hong Fok Corporation Limited (SGX:H30) with its market cap of S$489m, 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 vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into H30 here.
How much cash does H30 generate through its operations?
H30 has sustained its debt level by about S$797m over the last 12 months including long-term debt. At this stable level of debt, H30 currently has S$47m remaining in cash and short-term investments , ready to deploy into the business. Additionally, H30 has produced cash from operations of S$63m over the same time period, resulting in an operating cash to total debt ratio of 7.9%, signalling that H30’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In H30’s case, it is able to generate 0.079x cash from its debt capital.
Can H30 meet its short-term obligations with the cash in hand?
With current liabilities at S$177m, it appears that the company has been able to meet these commitments with a current assets level of S$260m, leading to a 1.47x current account ratio. For Real Estate companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can H30 service its debt comfortably?
H30’s level of debt is appropriate relative to its total equity, at 35%. H30 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether H30 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 H30’s, case, the ratio of 2x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
H30’s high cash coverage and appropriate 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 H30 has been performing in the past. You should continue to research Hong Fok to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for H30’s future growth? Take a look at our free research report of analyst consensus for H30’s outlook.
- Valuation: What is H30 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 H30 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 email@example.com.