Is Okura Holdings Limited’s (HKG:1655) Balance Sheet A Threat To Its Future?
Investors are always looking for growth in small-cap stocks like Okura Holdings Limited (HKG:1655), with a market cap of HK$550m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 1655 here.
How does 1655’s operating cash flow stack up against its debt?
1655 has shrunken its total debt levels in the last twelve months, from JP¥8.4b to JP¥6.9b , which also accounts for long term debt. With this reduction in debt, 1655’s cash and short-term investments stands at JP¥3.2b , ready to deploy into the business. On top of this, 1655 has generated cash from operations of JP¥1.2b over the same time period, resulting in an operating cash to total debt ratio of 17%, signalling that 1655’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1655’s case, it is able to generate 0.17x cash from its debt capital.
Can 1655 pay its short-term liabilities?
With current liabilities at JP¥2.5b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.89x. Generally, for Hospitality companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 1655 face the risk of succumbing to its debt-load?
1655 is a relatively highly levered company with a debt-to-equity of 64%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if 1655’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 1655, the ratio of 6.72x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 1655’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although 1655’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 1655’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Okura Holdings to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1655’s future growth? Take a look at our free research report of analyst consensus for 1655’s outlook.
Historical Performance: What has 1655’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.
