What Investors Should Know About Towngas China Company Limited's (HKG:1083) Financial Strength
While small-cap stocks, such as Towngas China Company Limited (HKG:1083) with its market cap of HK$16b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes essential, 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. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into 1083 here.
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1083’s Debt (And Cash Flows)
1083 has built up its total debt levels in the last twelve months, from HK$8.9b to HK$9.6b , which includes long-term debt. With this increase in debt, 1083's cash and short-term investments stands at HK$1.7b to keep the business going. Moreover, 1083 has generated cash from operations of HK$1.3b in the last twelve months, resulting in an operating cash to total debt ratio of 13%, signalling that 1083’s current level of operating cash is not high enough to cover debt.
Can 1083 pay its short-term liabilities?
Looking at 1083’s HK$9.0b in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of HK$4.5b, with a current ratio of 0.5x. The current ratio is the number you get when you divide current assets by current liabilities.
Does 1083 face the risk of succumbing to its debt-load?
With debt reaching 54% of equity, 1083 may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if 1083’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 1083, the ratio of 6.67x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 1083 ample headroom to grow its debt facilities.
Next Steps:
1083’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for 1083's financial health. Other important fundamentals need to be considered alongside. You should continue to research Towngas China to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1083’s future growth? Take a look at our free research report of analyst consensus for 1083’s outlook.
Valuation: What is 1083 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 1083 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.
