In This Article:
Pearl Oriental Oil Limited (SEHK:632) is a small-cap stock with a market capitalization of HK$473.13M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I suggest you dig deeper yourself into 632 here.
Does 632 generate enough cash through operations?
Over the past year, 632 has ramped up its debt from HK$33.00M to HK$58.30M . With this increase in debt, 632’s cash and short-term investments stands at HK$4.50M , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 632’s operating efficiency ratios such as ROA here.
Can 632 meet its short-term obligations with the cash in hand?
With current liabilities at HK$71.35M, the company is not able to meet these obligations given the level of current assets of HK$13.71M, with a current ratio of 0.19x below the prudent level of 3x.
Can 632 service its debt comfortably?
632’s level of debt is appropriate relative to its total equity, at 29.60%. 632 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with 632, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
632’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how 632 has been performing in the past. You should continue to research Pearl Oriental Oil to get a more holistic view of the stock by looking at: