TAT Hong Financial Statement Analysis Part 2C (Financial Health)

A company's financial health is one area that investors should not overlook and underestimate especially when a company are having increasing profits over years. It is important to keep their financial heath in check because they may be leveraging or borrowing excessively to achieve this result. If for an instance, recession is on the way, having a weak balance sheet may not see them through this tough period and in worst cases, the company may go bankrupt. In this section, I will attempt to analyse Tat Hong's financial health using some ratios and figures.

2 Financial Health

2a) Is the company's long term liability more than the equity
Debt to Equity ratio can be used to answer this. In 2005, 2006 and 2007, Tat hong's d/e ratio is at 0.43, 0.32 and 0.34 respectively. Quite simply, the higher the figure, the higher the leverage the company employs. Tat Hong's d/e ratio has increased in 2007 but it is still maintained at a safe level below 0.50. (Passed)

2b) Can the company pay off their long term liability with just earnings
The above metioned ratio has its weekness because some assets are never a source of funds unless the company is in bankruptcy. The best then, of a company's financial power is it's abilityto pay off its debt out of its earnings. In 2005,2006 and 2007, Tat hong has a net income of 20.77 million, 46.09 million and 84.17 million and long term liability of 76 million, 73 million and 100 million respectively. This tells us that Tat Hong can clear its long term debt at 2005,2006, 2007 in approximately 3 years, 1.5 years and 1.15 year respectively. This concludes that Tat Hong has a durable competitve advantage which enables them to pay off their long term debt within just few years with strong enough earnings. (Passed)

2c) Is the company leveraging excessively on their equity
A common measure of leverage is simply the financial leverage that is used in calculating ROE (a term which I will describe in later posts) , equal to assets divided by equity. In 2005, 2006 and 2007, Tat Hong's financial leverage is 2.34, 2.08 and 2.07 . What do all these numbers mean? Taking the 2005 ratio which is 2.34 to illustrate the example, it simply means a dollar in equity, Tat Hong has $2.34 in total assets which tells us it borrows the other $1.10. Over these 3 years, Tat Hong financial leverage has been decreasing steadily and profits soaring and this shows us that the the capital is well managed. A financial ratio of 2.1 is fairly conservative and its when we see ratios of 4 , 5 , or more, companies start to get really risk. (Passed)

2d) Can the company pay interest easily with their earnings before interest and taxes
Borrowing money comes at a cost: the interest that is payable month after month, year after year. Interest payments affect the company's profitability and for this reason, the comany's ability to meet interest obligations is one of the most important factor in analysing the company's financial health. In 2005, 2006 and 2007, Tat Hong interest coverage ratio is at 5.30, 7.77 and 11.74. The more times the company can pay its interest expense, the less likely that it will run into difficulty if earnings fall unexpectedly and as you can see, Tat Hong's ratio has been increasing steadily and in 2007, it's coverage ratio is at 11.74. In other words, Tat Hong has earned enough money in 2007 to cover it's interest obligation 11 times over which is pretty safe. The benchmark for construction industy is 3. where tat hong has surpassed it extensively. (Passed)

Financial Health : (5/5)
I will rate Tat Hong financial health full marks because as you can see the checks that I have made above, they have surpassed the expectations and this shows that it has the stability to get through unexpected problems . Although its true you might miss out companies with great potential of making astronomical profits with such stringent test but how difficult it is to find another microsoft in the making.. Out of 100, 99 failed so in my opinion, its better to play safe by sticking to companies with good financial health. In the next section, I will analyse Tat Hong's cash flow cycle by using some activity ratios.