What Investors Should Know About Century City International Holdings Limited’s (HKG:355) Financial Strength
While small-cap stocks, such as Century City International Holdings Limited (HKG:355) with its market cap of HK$2.3b, 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 355 here.
How does 355’s operating cash flow stack up against its debt?
Over the past year, 355 has ramped up its debt from HK$17b to HK$19b – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$4.2b for investing 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 355’s operating efficiency ratios such as ROA here.
Does 355’s liquid assets cover its short-term commitments?
Looking at 355’s HK$6.9b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$15b, leading to a 2.22x current account ratio. Usually, for Hospitality companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 355’s debt level acceptable?
With debt reaching 87% of equity, 355 may be thought of as relatively highly levered. 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 355’s case, the ratio of 3.13x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
355’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 355’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how 355 has been performing in the past. I suggest you continue to research Century City International Holdings to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 355’s future growth? Take a look at our free research report of analyst consensus for 355’s outlook.
Valuation: What is 355 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 355 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 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.
