Is Shanghai Industrial Urban Development Group Limited’s (HKG:563) Balance Sheet A Threat To Its Future?
While small-cap stocks, such as Shanghai Industrial Urban Development Group Limited (HKG:563) with its market cap of HK$6.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 563 here.
How much cash does 563 generate through its operations?
Over the past year, 563 has ramped up its debt from HK$15b to HK$18b , which accounts for long term debt. With this increase in debt, 563 currently has HK$10.0b remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. 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 563’s operating efficiency ratios such as ROA here.
Can 563 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$18b, it seems that the business has been able to meet these obligations given the level of current assets of HK$41b, with a current ratio of 2.28x. Usually, for Real Estate companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 563 face the risk of succumbing to its debt-load?
With debt reaching 75% of equity, 563 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 563 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 563’s, case, the ratio of 12.49x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 563’s high interest coverage is seen as responsible and safe practice.
Next Steps:
563’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. Since there is also no concerns around 563’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 563’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Shanghai Industrial Urban Development Group to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 563’s future growth? Take a look at our free research report of analyst consensus for 563’s outlook.
Historical Performance: What has 563’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.
