While small-cap stocks, such as Luks Group (Vietnam Holdings) Company Limited (HKG:366) with its market cap of HK$1.25b, 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, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 366 here.
How much cash does 366 generate through its operations?
Over the past year, 366 has ramped up its debt from HK$46.05m to HK$61.51m , which is mainly comprised of near term debt. With this increase in debt, 366’s cash and short-term investments stands at HK$202.90m , ready to deploy into the business. Moreover, 366 has produced cash from operations of HK$123.00m over the same time period, resulting in an operating cash to total debt ratio of 199.96%, meaning that 366’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 366’s case, it is able to generate 2x cash from its debt capital.
Does 366’s liquid assets cover its short-term commitments?
With current liabilities at HK$228.79m, it seems that the business has been able to meet these commitments with a current assets level of HK$346.01m, leading to a 1.51x current account ratio. Usually, for Basic Materials companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 366 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 2.67%, 366’s debt level is relatively low. 366 is not taking on too much debt commitment, which may be constraining for future growth.
366 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. 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 366’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Luks Group (Vietnam Holdings) to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 366’s future growth? Take a look at our free research report of analyst consensus for 366’s outlook.
- Historical Performance: What has 366’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 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.