Are Kai Yuan Holdings Limited’s (HKG:1215) Interest Costs Too High?
Investors are always looking for growth in small-cap stocks like Kai Yuan Holdings Limited (SEHK:1215), with a market cap of HK$651.72M. However, an important fact which most ignore is: how financially healthy is the business? Given that 1215 is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 1215 here.
Does 1215 generate an acceptable amount of cash through operations?
1215 has shrunken its total debt levels in the last twelve months, from HK$3,474.4M to HK$1,554.4M – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at HK$543.7M for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 1215’s operating efficiency ratios such as ROA here.
Can 1215 pay its short-term liabilities?
Looking at 1215’s most recent HK$67.1M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$666.3M, with a current ratio of 9.93x. However, a ratio greater than 3x may be considered as too high, as 1215 could be holding too much capital in a low-return investment environment.
Is 1215’s debt level acceptable?
1215 is a relatively highly levered company with a debt-to-equity of 79.10%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 1215 is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
At its current level of cash flow coverage, 1215 has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 1215 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Kai Yuan Holdings to get a better picture of the stock by looking at:
1. Historical Performance: What has 1215’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.
