Yahoo Finance What Investors Should Know About Shun Tak Holdings Limited’s (HKG:242) Financial Strength
Shun Tak Holdings Limited (HKG:242) is a small-cap stock with a market capitalization of HK$10.03b. 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? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 242 here.
How does 242’s operating cash flow stack up against its debt?
242’s debt levels surged from HK$11.55b to HK$16.43b over the last 12 months , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at HK$12.67b for investing into the business. Moreover, 242 has generated HK$2.22b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 13.50%, indicating that 242’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 242’s case, it is able to generate 0.14x cash from its debt capital.
Can 242 pay its short-term liabilities?
Looking at 242’s most recent HK$12.51b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$35.33b, with a current ratio of 2.82x. Generally, for Industrials companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 242 face the risk of succumbing to its debt-load?
With debt reaching 49.76% of equity, 242 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether 242 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 242’s, case, the ratio of 8.93x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 242 ample headroom to grow its debt facilities.
Next Steps:
242’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. This is only a rough assessment of financial health, and I’m sure 242 has company-specific issues impacting its capital structure decisions. You should continue to research Shun Tak Holdings to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 242’s future growth? Take a look at our free research report of analyst consensus for 242’s outlook.
Valuation: What is 242 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 242 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 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.
