What You Must Know About Playmates Holdings Limited’s (HKG:635) Financial Strength
While small-cap stocks, such as Playmates Holdings Limited (HKG:635) with its market cap of HK$1.98b, 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 crucial, since poor capital management may bring about 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, this commentary is still very high-level, so I suggest you dig deeper yourself into 635 here.
How does 635’s operating cash flow stack up against its debt?
635 has built up its total debt levels in the last twelve months, from HK$604.4m to HK$685.6m , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$1.68b , ready to deploy into the business. Additionally, 635 has produced HK$190.9m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 27.8%, meaning that 635’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 635’s case, it is able to generate 0.28x cash from its debt capital.
Can 635 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$739.4m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$1.79b, with a current ratio of 2.43x. Usually, for Leisure companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is 635’s debt level acceptable?
635’s level of debt is appropriate relative to its total equity, at 10.1%. This range is considered safe as 635 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 635 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 635’s, case, the ratio of 12.94x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 635 ample headroom to grow its debt facilities.
Next Steps:
635’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 635’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Playmates Holdings to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 635’s future growth? Take a look at our free research report of analyst consensus for 635’s outlook.
Valuation: What is 635 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 635 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.
