What You Must Know About Huan Yue Interactive Holdings Limited’s (HKG:505) Financial Strength
While small-cap stocks, such as Huan Yue Interactive Holdings Limited (HKG:505) with its market cap of HK$702m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, 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. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into 505 here.
How does 505’s operating cash flow stack up against its debt?
Over the past year, 505 has reduced its debt from CN¥861m to CN¥736m , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at CN¥182m for investing into the business. Moreover, 505 has produced cash from operations of CN¥115m during the same period of time, leading to an operating cash to total debt ratio of 16%, meaning that 505’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 505’s case, it is able to generate 0.16x cash from its debt capital.
Can 505 pay its short-term liabilities?
With current liabilities at CN¥1.3b, it seems that the business has been able to meet these commitments with a current assets level of CN¥1.5b, leading to a 1.14x current account ratio. For Electrical companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 505 service its debt comfortably?
With a debt-to-equity ratio of 67%, 505 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if 505’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 505, the ratio of 7.17x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
505’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 505’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 505’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Huan Yue Interactive Holdings to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 505’s future growth? Take a look at our free research report of analyst consensus for 505’s outlook.
Valuation: What is 505 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 505 is currently mispriced by the market.
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.
