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Investors are always looking for growth in small-cap stocks like Overseas Chinese Town (Asia) Holdings Limited (HKG:3366), with a market cap of HK$2.2b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about 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, this is just a partial view of the stock, and I recommend you dig deeper yourself into 3366 here.
3366’s Debt (And Cash Flows)
3366's debt levels surged from CN¥6.4b to CN¥8.4b over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CN¥3.6b , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 3366’s operating efficiency ratios such as ROA here.
Can 3366 pay its short-term liabilities?
Looking at 3366’s CN¥11b in current liabilities, the company has been able to meet these obligations given the level of current assets of CN¥12b, with a current ratio of 1.09x. The current ratio is calculated by dividing current assets by current liabilities. For Real Estate companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 3366 service its debt comfortably?
With debt reaching 65% of equity, 3366 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 check to see whether 3366 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 3366's, case, the ratio of 1.67x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
3366’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. Since there is also no concerns around 3366's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 3366's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Overseas Chinese Town (Asia) Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 3366’s future growth? Take a look at our free research report of analyst consensus for 3366’s outlook.
- Historical Performance: What has 3366'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.
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 firstname.lastname@example.org. 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.