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Are BeijingWest Industries International Limited’s (HKG:2339) Interest Costs Too High?

Laura Kearns

Investors are always looking for growth in small-cap stocks like BeijingWest Industries International Limited (HKG:2339), with a market cap of HK$557.1m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about 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. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 2339 here.

How does 2339’s operating cash flow stack up against its debt?

2339 has built up its total debt levels in the last twelve months, from HK$287.4m to HK$479.5m – this includes both the current and long-term debt. With this rise in debt, 2339’s cash and short-term investments stands at HK$658.0m , ready to deploy into the business. Additionally, 2339 has generated cash from operations of HK$148.3m in the last twelve months, resulting in an operating cash to total debt ratio of 30.9%, signalling that 2339’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 2339’s case, it is able to generate 0.31x cash from its debt capital.

Can 2339 meet its short-term obligations with the cash in hand?

At the current liabilities level of HK$1.52b liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$1.87b, leading to a 1.23x current account ratio. Generally, for Auto Components companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

SEHK:2339 Historical Debt September 17th 18

Is 2339’s debt level acceptable?

2339 is a relatively highly levered company with a debt-to-equity of 44.1%. 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 2339 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 2339’s, case, the ratio of 2.77x 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.

Next Steps:

2339’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. 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 2339 has been performing in the past. You should continue to research BeijingWest Industries International to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 2339’s future growth? Take a look at our free research report of analyst consensus for 2339’s outlook.
  2. Historical Performance: What has 2339’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.
  3. 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.