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While small-cap stocks, such as The United Laboratories International Holdings Limited (HKG:3933) with its market cap of HK$6.8b, 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into 3933 here.
3933’s Debt (And Cash Flows)
3933 has shrunk its total debt levels in the last twelve months, from CN¥4.9b to CN¥4.3b , which also accounts for long term debt. With this debt payback, 3933's cash and short-term investments stands at CN¥1.6b , ready to be used for running the business. Moreover, 3933 has generated cash from operations of CN¥1.2b in the last twelve months, leading to an operating cash to total debt ratio of 29%, signalling that 3933’s operating cash is sufficient to cover its debt.
Can 3933 pay its short-term liabilities?
With current liabilities at CN¥6.5b, it appears that the company has been able to meet these obligations given the level of current assets of CN¥6.7b, with a current ratio of 1.03x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Pharmaceuticals companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is 3933’s debt level acceptable?
With a debt-to-equity ratio of 69%, 3933 can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether 3933 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 3933's, case, the ratio of 4.03x suggests that interest is appropriately 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.
3933’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 3933'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 3933 has been performing in the past. I recommend you continue to research United Laboratories International Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 3933’s future growth? Take a look at our free research report of analyst consensus for 3933’s outlook.
- Valuation: What is 3933 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 3933 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.
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.