What Investors Should Know About Leeport (Holdings) Limited's (HKG:387) Financial Strength
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Investors are always looking for growth in small-cap stocks like Leeport (Holdings) Limited (HKG:387), with a market cap of HK$274m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to 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, this is just a partial view of the stock, and I recommend you dig deeper yourself into 387 here.
Does 387 Produce Much Cash Relative To Its Debt?
Over the past year, 387 has ramped up its debt from HK$143m to HK$203m , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at HK$134m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 387’s operating efficiency ratios such as ROA here.
Can 387 meet its short-term obligations with the cash in hand?
Looking at 387’s HK$446m in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.98x. The current ratio is the number you get when you divide current assets by current liabilities.
Can 387 service its debt comfortably?
387 is a relatively highly levered company with a debt-to-equity of 46%. 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 387’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 387, the ratio of 2.55x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 387’s low interest coverage already puts the company at higher risk of default.
Next Steps:
387’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for 387's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Leeport (Holdings) to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 387’s future growth? Take a look at our free research report of analyst consensus for 387’s outlook.
Historical Performance: What has 387'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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