What Investors Should Know About Hon Corporation Limited's (HKG:8259) Financial Strength
Hon Corporation Limited (HKG:8259) is a small-cap stock with a market capitalization of HK$518m. 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? 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. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into 8259 here.
8259’s Debt (And Cash Flows)
Over the past year, 8259 has reduced its debt from S$23m to S$20m – this includes long-term debt. With this reduction in debt, 8259 currently has S$6.0m remaining in cash and short-term investments to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of 8259’s operating efficiency ratios such as ROA here.
Can 8259 meet its short-term obligations with the cash in hand?
Looking at 8259’s S$51m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.22x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Construction companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is 8259’s debt level acceptable?
With debt reaching 94% of equity, 8259 may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if 8259’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 8259, the ratio of 8.54x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 8259 ample headroom to grow its debt facilities.
Next Steps:
Although 8259’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 8259 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Hon to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 8259’s future growth? Take a look at our free research report of analyst consensus for 8259’s outlook.
Historical Performance: What has 8259's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
