Is Tsaker Chemical Group Limited (HKG:1986) A Financially Sound Company?
Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
While small-cap stocks, such as Tsaker Chemical Group Limited (HKG:1986) with its market cap of HK$1.5b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into 1986 here.
How much cash does 1986 generate through its operations?
Over the past year, 1986 has maintained its debt levels at around CN¥542m which accounts for long term debt. At this constant level of debt, 1986’s cash and short-term investments stands at CN¥190m for investing into the business. Additionally, 1986 has produced CN¥225m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 42%, meaning that 1986’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1986’s case, it is able to generate 0.42x cash from its debt capital.
Does 1986’s liquid assets cover its short-term commitments?
With current liabilities at CN¥709m, the company has been able to meet these commitments with a current assets level of CN¥837m, leading to a 1.18x current account ratio. For Chemicals companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 1986 service its debt comfortably?
With debt reaching 44% of equity, 1986 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 1986 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 1986’s, case, the ratio of 33.24x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although 1986’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. Keep in mind I haven’t considered other factors such as how 1986 has been performing in the past. I suggest you continue to research Tsaker Chemical Group to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1986’s future growth? Take a look at our free research report of analyst consensus for 1986’s outlook.
Valuation: What is 1986 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 1986 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.
