How Financially Strong Is Hopson Development Holdings Limited (HKG:754)?
Hopson Development Holdings Limited (HKG:754) is a small-cap stock with a market capitalization of HK$18b. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into 754 here.
Does 754 Produce Much Cash Relative To Its Debt?
754's debt level has been constant at around HK$56b over the previous year including long-term debt. At this current level of debt, 754's cash and short-term investments stands at HK$8.2b to keep the business going. Moreover, 754 has generated HK$5.5b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 10.0%, meaning that 754’s current level of operating cash is not high enough to cover debt.
Can 754 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$46b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.15x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Real Estate companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can 754 service its debt comfortably?
754 is a relatively highly levered company with a debt-to-equity of 82%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 754's case, the ratio of 18.07x 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 754’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure 754 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Hopson Development Holdings to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 754’s future growth? Take a look at our free research report of analyst consensus for 754’s outlook.
Valuation: What is 754 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 754 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.
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