While small-cap stocks, such as Pearl Oriental Oil Limited (SEHK:632) with its market cap of HK$858.77M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 632 here.
Does 632 generate an acceptable amount of cash through operations?
632 has built up its total debt levels in the last twelve months, from HK$20.0M to HK$33.0M , which is mainly comprised of near term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$4.7M for investing into the business. Though 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. For this article’s sake, I won’t be looking at this today, but you can assess some of 632’s operating efficiency ratios such as ROA here.
Does 632’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$36.5M liabilities, the company has not been able to meet these commitments with a current assets level of HK$9.6M, leading to a 0.26x current account ratio. which is under the appropriate industry ratio of 3x.
Can 632 service its debt comfortably?
632’s level of debt is appropriate relative to its total equity, at 15.15%. 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:
Are you a shareholder? Although 632’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may change. You should always be keeping on top of market expectations for 632’s future growth on our free analysis platform.
Are you a potential investor? 632 seems to have a sensible level of debt, meaning there’s some room to take on more debt if needed. But its current cash flow coverage of existing debt, in addition to the low liquidity, is concerning. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of 632’s track record. You should continue your analysis by taking a look at 632’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass 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.