Are Eagle Legend Asia Limited’s (HKG:936) Interest Costs Too High?
Investors are always looking for growth in small-cap stocks like Eagle Legend Asia Limited (HKG:936), with a market cap of HK$985.8m. However, an important fact which most ignore is: how financially healthy is the business? Given that 936 is not presently profitable, 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. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into 936 here.
How much cash does 936 generate through its operations?
936 has shrunken its total debt levels in the last twelve months, from HK$274.0m to HK$220.0m , which is made up of current and long term debt. With this debt payback, 936 currently has HK$141.9m remaining in cash and short-term investments for investing into the business. On top of this, 936 has produced cash from operations of HK$64.8m in the last twelve months, resulting in an operating cash to total debt ratio of 29.5%, signalling that 936’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In 936’s case, it is able to generate 0.29x cash from its debt capital.
Does 936’s liquid assets cover its short-term commitments?
Looking at 936’s most recent HK$297.9m liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$341.4m, leading to a 1.15x current account ratio. For Trade Distributors companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 936 face the risk of succumbing to its debt-load?
936 is a relatively highly levered company with a debt-to-equity of 40.3%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 936 is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although 936’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 936’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 936’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Eagle Legend Asia to get a better picture of the small-cap by looking at:
Historical Performance: What has 936’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.
