What Investors Should Know About Wuzhou International Holdings Limited’s (HKG:1369) Financial Strength
Wuzhou International Holdings Limited (SEHK:1369) is a small-cap stock with a market capitalization of HK$3.74B. 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? 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. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into 1369 here.
How does 1369’s operating cash flow stack up against its debt?
1369’s debt levels surged from CN¥7.51B to CN¥10.62B over the last 12 months – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CN¥3.09B , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. 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 1369’s operating efficiency ratios such as ROA here.
Can 1369 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥12.87B, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.04x. For Real Estate companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does 1369 face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, 1369 is a highly leveraged company. 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 1369’s case, the ratio of 0.71x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
1369’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 1369’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Wuzhou International Holdings to get a more holistic view of the stock by looking at:
1. Historical Performance: What has 1369’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.
2. 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.
