While small-cap stocks, such as China Primary Energy Holdings Limited (SEHK:8117) with its market cap of HK$800.57M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 8117 is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 8117 here.
Does 8117 generate enough cash through operations?
8117 has sustained its debt level by about HK$53.4M over the last 12 months made up of current and long term debt. At this stable level of debt, 8117 currently has HK$18.8M remaining in cash and short-term investments for investing into the business. Moreover, 8117 has generated HK$11.2M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.21x, indicating that 8117’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In 8117’s case, it is able to generate 0.21x cash from its debt capital.
Does 8117’s liquid assets cover its short-term commitments?
With current liabilities at HK$113.4M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.43x. Generally, for gas utilities companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does 8117 face the risk of succumbing to its debt-load?
8117’s level of debt is appropriate relative to its total equity, at 32.26%. 8117 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for 8117, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
Are you a shareholder? 8117 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Though, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may change. I recommend keeping on top of market expectations for 8117’s future growth on our free analysis platform.