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What Investors Should Know About Asia Cassava Resources Holdings Limited’s (HKG:841) Financial Strength

Investors are always looking for growth in small-cap stocks like Asia Cassava Resources Holdings Limited (HKG:841), with a market cap of HK$275m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, 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, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 841 here.

How does 841’s operating cash flow stack up against its debt?

Over the past year, 841 has reduced its debt from HK$206m to HK$181m . With this reduction in debt, 841 currently has HK$115m remaining in cash and short-term investments for investing into the business. On top of this, 841 has generated HK$105m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 58%, meaning that 841’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 841’s case, it is able to generate 0.58x cash from its debt capital.

Can 841 meet its short-term obligations with the cash in hand?

Looking at 841’s HK$321m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.29x. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

SEHK:841 Historical Debt, March 6th 2019
SEHK:841 Historical Debt, March 6th 2019

Can 841 service its debt comfortably?

With a debt-to-equity ratio of 21%, 841’s debt level may be seen as prudent. This range is considered safe as 841 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether 841 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 841’s, case, the ratio of 3.54x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 841 ample headroom to grow its debt facilities.

Next Steps:

841’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 841 has company-specific issues impacting its capital structure decisions. You should continue to research Asia Cassava Resources Holdings to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 841’s future growth? Take a look at our free research report of analyst consensus for 841’s outlook.

  2. Valuation: What is 841 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 841 is currently mispriced by the market.

  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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