Is Changshouhua Food Company Limited’s (HKG:1006) Balance Sheet A Threat To Its Future?
Changshouhua Food Company Limited (HKG:1006), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is 1006 will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean 1006 has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
See our latest analysis for Changshouhua Food
Is 1006 growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. Either 1006 does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. 1006’s revenue growth over the past year is a single-digit 0.2% which is relatively low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can 1006 meet its short-term obligations with the cash in hand?
Since Changshouhua Food doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at CN¥376m, it appears that the company has been able to meet these commitments with a current assets level of CN¥2.2b, leading to a 5.95x current account ratio. However, a ratio greater than 3x may be considered as quite high, and some might argue 1006 could be holding too much capital in a low-return investment environment.
Next Steps:
1006 is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, 1006’s financial situation may change. Keep in mind I haven’t considered other factors such as how 1006 has been performing in the past. You should continue to research Changshouhua Food to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1006’s future growth? Take a look at our free research report of analyst consensus for 1006’s outlook.
Valuation: What is 1006 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 1006 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 editorial-team@simplywallst.com.
