While small-cap stocks, such as China HGS Real Estate Inc (NASDAQ:HGSH) with its market cap of US$76.59m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, 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. However, this commentary is still very high-level, so I suggest you dig deeper yourself into HGSH here.
How does HGSH’s operating cash flow stack up against its debt?
HGSH has built up its total debt levels in the last twelve months, from US$108.68m to US$0 , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$3.43m , 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 examine some of HGSH’s operating efficiency ratios such as ROA here.
Does HGSH’s liquid assets cover its short-term commitments?
With current liabilities at US$110.04m, it seems that the business has been able to meet these obligations given the level of current assets of US$185.28m, with a current ratio of 1.68x. For Real Estate companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is HGSH’s debt level acceptable?
With debt reaching 77.70% of equity, HGSH may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 HGSH’s case, the ratio of 20.52x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as HGSH’s high interest coverage is seen as responsible and safe practice.
HGSH’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure HGSH has company-specific issues impacting its capital structure decisions. I recommend you continue to research China HGS Real Estate to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HGSH’s future growth? Take a look at our free research report of analyst consensus for HGSH’s outlook.
- Valuation: What is HGSH 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 HGSH 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.