Is Road King Infrastructure Limited’s (HKG:1098) Balance Sheet A Threat To Its Future?
Investors are always looking for growth in small-cap stocks like Road King Infrastructure Limited (HKG:1098), with a market cap of HK$9.6b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 1098 here.
Does 1098 produce enough cash relative to debt?
Over the past year, 1098 has ramped up its debt from HK$20b to HK$22b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at HK$10.0b for investing into the business. Moreover, 1098 has produced HK$8.4b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 38%, signalling that 1098’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 1098’s case, it is able to generate 0.38x cash from its debt capital.
Can 1098 pay its short-term liabilities?
With current liabilities at HK$39b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.38x. Generally, for Real Estate companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 1098 service its debt comfortably?
Since total debt levels have outpaced equities, 1098 is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Next Steps:
1098’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how 1098 has been performing in the past. I suggest you continue to research Road King Infrastructure to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1098’s future growth? Take a look at our free research report of analyst consensus for 1098’s outlook.
Valuation: What is 1098 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 1098 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.
