Are Emperor International Holdings Limited’s (HKG:163) Interest Costs Too High?
While small-cap stocks, such as Emperor International Holdings Limited (HKG:163) with its market cap of HK$8.72b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I suggest you dig deeper yourself into 163 here.
How much cash does 163 generate through its operations?
163 has built up its total debt levels in the last twelve months, from HK$23.43b to HK$0 , which comprises of short- and long-term debt. With this increase in debt, 163 currently has HK$4.37b 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 take a look at some of 163’s operating efficiency ratios such as ROA here.
Can 163 pay its short-term liabilities?
At the current liabilities level of HK$8.35b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$9.18b, with a current ratio of 1.1x. Generally, for Real Estate companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 163 service its debt comfortably?
163 is a relatively highly levered company with a debt-to-equity of 81.90%. 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 163’s case, the ratio of 2.26x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 163’s low interest coverage already puts the company at higher risk of default.
Next Steps:
At its current level of cash flow coverage, 163 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. Keep in mind I haven’t considered other factors such as how 163 has been performing in the past. I recommend you continue to research Emperor International Holdings to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 163’s future growth? Take a look at our free research report of analyst consensus for 163’s outlook.
Valuation: What is 163 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 163 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 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.
