Investors are always looking for growth in small-cap stocks like Kasen International Holdings Limited (SEHK:496), with a market cap of HK$2.01B. However, an important fact which most ignore is: how financially healthy is the business? Consumer Durables businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 496 here.
How does 496’s operating cash flow stack up against its debt?
496 has shrunken its total debt levels in the last twelve months, from CN¥2,038.2M to CN¥780.9M , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at CN¥452.6M , ready to deploy into the business. Moreover, 496 has produced CN¥436.2M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 0.56x, meaning that 496’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In 496’s case, it is able to generate 0.56x cash from its debt capital.
Can 496 pay its short-term liabilities?
At the current liabilities level of CN¥2,812.6M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CN¥5,339.8M, with a current ratio of 1.9x. Generally, for consumer durables companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 496 service its debt comfortably?
With debt at 21.13% of equity, 496 may be thought of as appropriately levered. 496 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with 496, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Are you a shareholder? 496’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, its financial position may be different. I suggest researching market expectations for 496’s future growth on our free analysis platform.
Are you a potential investor? Although 496’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. Moreover, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more confidence in the stock, you need to also examine 496’s track record. As a following step, you should take a look at 496’s past performance analysis on our free platform to conclude on 496’s financial health.
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.