You Might Like Shangri-La Asia Limited (HKG:69) But Do You Like Its Debt?
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Investors are always looking for growth in small-cap stocks like Shangri-La Asia Limited (HKG:69), with a market cap of HK$36b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into 69 here.
Does 69 Produce Much Cash Relative To Its Debt?
69's debt level has been constant at around US$5.2b over the previous year including long-term debt. At this constant level of debt, 69 currently has US$1.1b remaining in cash and short-term investments to keep the business going. On top of this, 69 has generated cash from operations of US$446m over the same time period, leading to an operating cash to total debt ratio of 8.6%, meaning that 69’s current level of operating cash is not high enough to cover debt.
Can 69 pay its short-term liabilities?
Looking at 69’s US$1.5b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$1.6b, leading to a 1.11x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Hospitality companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 69 service its debt comfortably?
69 is a relatively highly levered company with a debt-to-equity of 78%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 69's case, the ratio of 2.12x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 69’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Although 69’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. I admit this is a fairly basic analysis for 69's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Shangri-La Asia to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 69’s future growth? Take a look at our free research report of analyst consensus for 69’s outlook.
Valuation: What is 69 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 69 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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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.
