Is A & S Group (Holdings) Limited’s (HKG:1737) Balance Sheet A Threat To Its Future?
A & S Group (Holdings) Limited (HKG:1737) is a small-cap stock with a market capitalization of HK$177m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 1737 here.
How much cash does 1737 generate through its operations?
1737’s debt levels have fallen from HK$46m to HK$35m over the last 12 months , which is mainly comprised of near term debt. With this debt payback, the current cash and short-term investment levels stands at HK$126m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of 1737’s operating efficiency ratios such as ROA here.
Can 1737 pay its short-term liabilities?
At the current liabilities level of HK$66m, the company has been able to meet these obligations given the level of current assets of HK$246m, with a current ratio of 3.72x. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Is 1737’s debt level acceptable?
With a debt-to-equity ratio of 19%, 1737’s debt level may be seen as prudent. This range is considered safe as 1737 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 1737 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 1737’s, case, the ratio of 11.83x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 1737’s high interest coverage is seen as responsible and safe practice.
Next Steps:
1737’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 1737 has been performing in the past. You should continue to research A & S Group (Holdings) to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1737’s future growth? Take a look at our free research report of analyst consensus for 1737’s outlook.
Historical Performance: What has 1737’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.
