Ares Asia Limited (HKG:645): Time For A Financial Health Check
Ares Asia Limited (SEHK:645) is a small-cap stock with a market capitalization of HK$465.28M. 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? Since 645 is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into 645 here.
Does 645 generate an acceptable amount of cash through operations?
645 has built up its total debt levels in the last twelve months, from $9.1M to $56.1M . With this growth in debt, 645’s cash and short-term investments stands at $12.2M , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 assess some of 645’s operating efficiency ratios such as ROA here.
Can 645 meet its short-term obligations with the cash in hand?
Looking at 645’s most recent $61.2M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $72.5M, leading to a 1.18x current account ratio. Usually, for Trade Distributors companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 645 service its debt comfortably?
With total debt exceeding equities, 645 is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 645 is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
645’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. I admit this is a fairly basic analysis for 645’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Ares Asia to get a better picture of the stock by looking at:
1. Valuation: What is 645 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 645 is currently mispriced by the market.
2. Historical Performance: What has 645’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.
To help readers see pass 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.
