Is Tongda Group Holdings Limited (HKG:698) A Financially Sound Company?
Investors are always looking for growth in small-cap stocks like Tongda Group Holdings Limited (HKG:698), with a market cap of HK$6.4b. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 698 here.
How much cash does 698 generate through its operations?
698 has built up its total debt levels in the last twelve months, from HK$3.2b to HK$4.2b , which comprises of short- and long-term debt. With this increase in debt, 698 currently has HK$1.0b remaining in cash and short-term investments for investing into the business. Additionally, 698 has produced HK$633m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 15%, indicating that 698’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 698’s case, it is able to generate 0.15x cash from its debt capital.
Can 698 pay its short-term liabilities?
With current liabilities at HK$6.2b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.39x. Usually, for Electronic 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 698 service its debt comfortably?
With a debt-to-equity ratio of 65%, 698 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 698’s case, the ratio of 9.24x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 698 ample headroom to grow its debt facilities.
Next Steps:
698’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 698’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Tongda Group Holdings to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 698’s future growth? Take a look at our free research report of analyst consensus for 698’s outlook.
Valuation: What is 698 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 698 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.
