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Shenzhen International Holdings Limited (HKG:152) is a small-cap stock with a market capitalization of HK$36b. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into 152 here.
Does 152 Produce Much Cash Relative To Its Debt?
152's debt levels surged from HK$21b to HK$27b over the last 12 months , which accounts for long term debt. With this rise in debt, 152's cash and short-term investments stands at HK$15b , ready to be used for running the business. On top of this, 152 has generated cash from operations of HK$2.1b during the same period of time, leading to an operating cash to total debt ratio of 7.9%, meaning that 152’s operating cash is less than its debt.
Can 152 pay its short-term liabilities?
Looking at 152’s HK$12b in current liabilities, the company has been able to meet these obligations given the level of current assets of HK$30b, with a current ratio of 2.4x. The current ratio is calculated by dividing current assets by current liabilities. For Infrastructure companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 152’s debt level acceptable?
With a debt-to-equity ratio of 60%, 152 can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if 152’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 152, the ratio of 3.03x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 152 ample headroom to grow its debt facilities.
Although 152’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. Since there is also no concerns around 152's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how 152 has been performing in the past. I suggest you continue to research Shenzhen International Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 152’s future growth? Take a look at our free research report of analyst consensus for 152’s outlook.
- Historical Performance: What has 152'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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.