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What You Must Know About Travel Expert (Asia) Enterprises Limited’s (HKG:1235) Financial Strength

Investors are always looking for growth in small-cap stocks like Travel Expert (Asia) Enterprises Limited (HKG:1235), with a market cap of HK$260m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, 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. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into 1235 here.

How does 1235’s operating cash flow stack up against its debt?

1235 has shrunken its total debt levels in the last twelve months, from HK$26m to HK$22m made up of predominantly near term debt. With this debt payback, 1235’s cash and short-term investments stands at HK$155m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 1235’s operating efficiency ratios such as ROA here.

Can 1235 pay its short-term liabilities?

Looking at 1235’s most recent HK$196m liabilities, the company has been able to meet these obligations given the level of current assets of HK$266m, with a current ratio of 1.36x. For Hospitality companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

SEHK:1235 Historical Debt October 12th 18

Is 1235’s debt level acceptable?

With a debt-to-equity ratio of 14%, 1235’s debt level may be seen as prudent. This range is considered safe as 1235 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 1235’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 1235, the ratio of 6.53x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 1235’s high interest coverage is seen as responsible and safe practice.

Next Steps:

1235’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 1235 has company-specific issues impacting its capital structure decisions. You should continue to research Travel Expert (Asia) Enterprises to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 1235’s future growth? Take a look at our free research report of analyst consensus for 1235’s outlook.
  2. Historical Performance: What has 1235’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.
  3. 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.