Is Lion Rock Group Limited’s (HKG:1127) Balance Sheet Strong Enough To Weather A Storm?
Investors are always looking for growth in small-cap stocks like Lion Rock Group Limited (HKG:1127), with a market cap of HK$1.1b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into 1127 here.
How does 1127’s operating cash flow stack up against its debt?
Over the past year, 1127 has ramped up its debt from HK$85m to HK$128m , which is mainly comprised of near term debt. With this increase in debt, 1127’s cash and short-term investments stands at HK$343m , ready to deploy into the business. Additionally, 1127 has produced cash from operations of HK$78m during the same period of time, resulting in an operating cash to total debt ratio of 61%, signalling that 1127’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1127’s case, it is able to generate 0.61x cash from its debt capital.
Can 1127 pay its short-term liabilities?
At the current liabilities level of HK$433m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.38x. For Commercial Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does 1127 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 13%, 1127’s debt level may be seen as prudent. This range is considered safe as 1127 is not taking on too much debt obligation, which may be constraining for future growth.
Next Steps:
1127’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, 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 1127’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Lion Rock Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1127’s future growth? Take a look at our free research report of analyst consensus for 1127’s outlook.
Historical Performance: What has 1127’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.
