Is Pacific Century Premium Developments Limited's (HKG:432) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

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Pacific Century Premium Developments Limited (HKG:432) is a small-cap stock with a market capitalization of HK$837m. 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? Since 432 is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. 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’d encourage you to dig deeper yourself into 432 here.

Does 432 Produce Much Cash Relative To Its Debt?

Over the past year, 432 has ramped up its debt from HK$4.5b to HK$6.2b , which includes long-term debt. With this increase in debt, 432 currently has HK$868m remaining in cash and short-term investments , ready to be used for running the business. Moving on, operating cash flow was negative 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 take a look at some of 432’s operating efficiency ratios such as ROA here.

Can 432 meet its short-term obligations with the cash in hand?

Looking at 432’s HK$1.0b in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.63x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Real Estate companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

SEHK:432 Historical Debt, June 12th 2019

Can 432 service its debt comfortably?

Since total debt levels exceed equity, 432 is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since 432 is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

432’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 432's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure 432 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Pacific Century Premium Developments to get a better picture of the small-cap by looking at:

  1. Historical Performance: What has 432'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.
  2. 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.