Is Chinney Investments, Limited (HKG:216) A Financially Sound Company?
While small-cap stocks, such as Chinney Investments, Limited (HKG:216) with its market cap of HK$1.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 216 here.
How much cash does 216 generate through its operations?
Over the past year, 216 has reduced its debt from HK$5.8b to HK$4.9b – this includes long-term debt. With this reduction in debt, 216 currently has HK$2.0b 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. For this article’s sake, I won’t be looking at this today, but you can assess some of 216’s operating efficiency ratios such as ROA here.
Does 216’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$3.7b, the company has been able to meet these obligations given the level of current assets of HK$4.1b, with a current ratio of 1.09x. Usually, for Real Estate companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can 216 service its debt comfortably?
With a debt-to-equity ratio of 44%, 216 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 216 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 216’s, case, the ratio of 7.83x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 216 ample headroom to grow its debt facilities.
Next Steps:
Although 216’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 216’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 216’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Chinney Investments to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 216’s future growth? Take a look at our free research report of analyst consensus for 216’s outlook.
Historical Performance: What has 216’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.
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.
