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Why REF Holdings Limited (HKG:1631) Is A Financially Healthy Company

Jacob Boyd

Zero-debt allows substantial financial flexibility, especially for small-cap companies like REF Holdings Limited (SEHK:1631), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While 1631 has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status. View our latest analysis for REF Holdings

Is 1631 right in choosing financial flexibility over lower cost of capital?

Debt capital generally has lower cost of capital compared to equity funding. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either 1631 does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. 1631’s revenue growth over the past year is a double-digit 25.11% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.

SEHK:1631 Historical Debt Feb 13th 18

Can 1631 pay its short-term liabilities?

Since REF Holdings doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of HK$46.16M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.28x. Though, a ratio greater than 3x may be considered as too high, as 1631 could be holding too much capital in a low-return investment environment.

Next Steps:

Given that REF Holdings is a relatively low-growth company, not taking advantage of lower cost debt may not be the best strategy. As shareholders, you should try and determine whether this strategy is justified for 1631, and whether the company needs financial flexibility at this point in time. Keep in mind I haven’t considered other factors such as how 1631 has been performing in the past. You should continue to research REF Holdings to get a better picture of the stock by looking at:

To help readers see pass 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.