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While small-cap stocks, such as Regal Hotels International Holdings Limited (HKG:78) with its market cap of HK$4.4b, 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into 78 here.
Does 78 Produce Much Cash Relative To Its Debt?
78's debt level has been constant at around HK$15b over the previous year including long-term debt. At this constant level of debt, 78's cash and short-term investments stands at HK$4.5b , ready to be used for running the business. Additionally, 78 has produced cash from operations of HK$218m over the same time period, leading to an operating cash to total debt ratio of 1.5%, signalling that 78’s debt is not covered by operating cash.
Does 78’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$1.7b, it seems that the business has been able to meet these obligations given the level of current assets of HK$5.5b, with a current ratio of 3.27x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Can 78 service its debt comfortably?
With debt reaching 96% of equity, 78 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 78 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 78's, case, the ratio of 4.9x 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.
78’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 78's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure 78 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Regal Hotels International Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 78’s future growth? Take a look at our free research report of analyst consensus for 78’s outlook.
- Valuation: What is 78 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 78 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.
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.