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Hebei Construction Group Corporation Limited (HKG:1727) is a small-cap stock with a market capitalization of HK$11b. 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? Understanding the company's financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 1727 here.
1727’s Debt (And Cash Flows)
1727's debt level has been constant at around CN¥3.5b over the previous year which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at CN¥9.1b , ready to be used for running the business. Moreover, 1727 has generated cash from operations of CN¥939m during the same period of time, leading to an operating cash to total debt ratio of 27%, signalling that 1727’s operating cash is sufficient to cover its debt.
Can 1727 pay its short-term liabilities?
At the current liabilities level of CN¥54b, it seems that the business has been able to meet these commitments with a current assets level of CN¥57b, leading to a 1.07x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Construction companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 1727 service its debt comfortably?
With debt reaching 61% of equity, 1727 may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether 1727 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 1727's, case, the ratio of 21.19x suggests that interest is comfortably 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.
Although 1727’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 1727'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 1727 has been performing in the past. You should continue to research Hebei Construction Group to get a more holistic view of the small-cap by looking at:
- Valuation: What is 1727 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 1727 is currently mispriced by the market.
- Historical Performance: What has 1727'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.
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 email@example.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.