Is Emperor Watch & Jewellery Limited’s (HKG:887) Balance Sheet Strong Enough To Weather A Storm?
Emperor Watch & Jewellery Limited (HKG:887), 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 887 will have to follow strict debt obligations which will reduce its financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess 887’s financial health.
Check out our latest analysis for Emperor Watch & Jewellery
Is financial flexibility worth the 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 887 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. 887’s revenue growth over the past year is a double-digit 24% which is considerably high for a small-cap company. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Does 887’s liquid assets cover its short-term commitments?
Since Emperor Watch & Jewellery 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 HK$300m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 14.93x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Next Steps:
As a high-growth company, it may be beneficial for 887 to have some financial flexibility, hence zero-debt. Since there is also no concerns around 887’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, 887’s financial situation may change. I admit this is a fairly basic analysis for 887’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Emperor Watch & Jewellery to get a more holistic view of the stock by looking at:
Valuation: What is 887 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 887 is currently mispriced by the market.
Historical Performance: What has 887’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.
