Putian Communication Group Limited (HKG:1720) is a small-cap stock with a market capitalization of HK$3.0b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Communications companies, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 1720 here.
Does 1720 produce enough cash relative to debt?
1720’s debt levels surged from CN¥48m to CN¥84m over the last 12 months – this includes long-term debt. With this growth in debt, 1720’s cash and short-term investments stands at CN¥22m , ready to deploy into the business. On top of this, 1720 has generated CN¥41m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 49%, indicating that 1720’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 1720’s case, it is able to generate 0.49x cash from its debt capital.
Does 1720’s liquid assets cover its short-term commitments?
With current liabilities at CN¥158m, it appears that the company has been able to meet these obligations given the level of current assets of CN¥376m, with a current ratio of 2.38x. Usually, for Communications 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.
Can 1720 service its debt comfortably?
1720’s level of debt is appropriate relative to its total equity, at 23%. 1720 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 1720 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 1720’s, case, the ratio of 14.49x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 1720’s high interest coverage is seen as responsible and safe practice.
1720 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 1720 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Putian Communication Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1720’s future growth? Take a look at our free research report of analyst consensus for 1720’s outlook.
- Historical Performance: What has 1720’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.
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