Is Shun Ho Property Investments Limited’s (HKG:219) Balance Sheet A Threat To Its Future?
Investors are always looking for growth in small-cap stocks like Shun Ho Property Investments Limited (HKG:219), with a market cap of HK$1.3b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 219 here.
How much cash does 219 generate through its operations?
219’s debt levels surged from HK$903m to HK$1.6b over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, 219’s cash and short-term investments stands at HK$931m , ready to deploy into the business. Additionally, 219 has produced HK$371m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 23%, signalling that 219’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 219’s case, it is able to generate 0.23x cash from its debt capital.
Can 219 meet its short-term obligations with the cash in hand?
With current liabilities at HK$593m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.63x. For Hospitality companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 219’s debt level acceptable?
With a debt-to-equity ratio of 20%, 219’s debt level may be seen as prudent. This range is considered safe as 219 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 219’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 219, the ratio of 13.35x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although 219’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 219 has been performing in the past. I recommend you continue to research Shun Ho Property Investments to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 219’s future growth? Take a look at our free research report of analyst consensus for 219’s outlook.
Valuation: What is 219 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 219 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.
