What Investors Should Know About Hon Kwok Land Investment Company Limited’s (HKG:160) Financial Strength
Hon Kwok Land Investment Company Limited (HKG:160) is a small-cap stock with a market capitalization of HK$2.7b. 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? So, understanding the company’s financial health becomes crucial, 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. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 160 here.
Does 160 produce enough cash relative to debt?
160 has shrunken its total debt levels in the last twelve months, from HK$5.4b to HK$4.5b , which is made up of current and long term debt. With this debt repayment, 160’s cash and short-term investments stands at HK$2.7b 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 160’s operating efficiency ratios such as ROA here.
Does 160’s liquid assets cover its short-term commitments?
Looking at 160’s most recent HK$4.5b liabilities, the company has been able to meet these obligations given the level of current assets of HK$5.4b, with a current ratio of 1.21x. Usually, for Real Estate companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is 160’s debt level acceptable?
With debt at 40% of equity, 160 may be thought of as appropriately levered. 160 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 160 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 160’s, case, the ratio of 8.33x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 160 ample headroom to grow its debt facilities.
Next Steps:
Although 160’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 160 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Hon Kwok Land Investment Company to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 160’s future growth? Take a look at our free research report of analyst consensus for 160’s outlook.
Historical Performance: What has 160’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.
