How Financially Strong Is China HGS Real Estate Inc (NASDAQ:HGSH)?

China HGS Real Estate Inc (NASDAQ:HGSH) is a small-cap stock with a market capitalization of US$57.66M. 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? So, understanding the company's financial health becomes vital, as mismanagement of capital can lead to 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. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into HGSH here.

Does HGSH generate enough cash through operations?

Over the past year, HGSH has ramped up its debt from US$108.68M to US$129.65M , which is made up of current and long term debt. With this growth in debt, HGSH currently has US$3.43M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of HGSH’s operating efficiency ratios such as ROA here.

Can HGSH pay its short-term liabilities?

Looking at HGSH’s most recent US$110.04M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.68x. For Real Estate companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does HGSH face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 78.84%, HGSH can be considered as an above-average leveraged company. 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 HGSH's case, the ratio of 17.34x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HGSH ample headroom to grow its debt facilities.

Next Steps:

At its current level of cash flow coverage, HGSH has room for improvement to better cushion for events which may require debt repayment. However, 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 HGSH has company-specific issues impacting its capital structure decisions. You should continue to research China HGS Real Estate to get a better picture of the stock by looking at:

1. Valuation: What is HGSH 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 HGSH is currently mispriced by the market.
2. Historical Performance: What has HGSH'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.
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.