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Investors are always looking for growth in small-cap stocks like Strong Petrochemical Holdings Limited (HKG:852), with a market cap of HK$1.1b. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 852 here.
How much cash does 852 generate through its operations?
852 has shrunken its total debt levels in the last twelve months, from HK$772m to HK$605m . With this debt repayment, 852 currently has HK$405m remaining in cash and short-term investments for investing into the business. Additionally, 852 has generated HK$262m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 43%, meaning that 852’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In 852’s case, it is able to generate 0.43x cash from its debt capital.
Can 852 pay its short-term liabilities?
Looking at 852’s HK$4.1b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. For Oil and Gas companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can 852 service its debt comfortably?
852 is a relatively highly levered company with a debt-to-equity of 49%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 852 is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
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852’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. This is only a rough assessment of financial health, and I’m sure 852 has company-specific issues impacting its capital structure decisions. You should continue to research Strong Petrochemical Holdings to get a better picture of the small-cap by looking at: