While small-cap stocks, such as Rosan Resources Holdings Limited (SEHK:578) with its market cap of HK$159.15M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into 578 here.
How does 578’s operating cash flow stack up against its debt?
578 has shrunken its total debt levels in the last twelve months, from HK$667.2M to HK$573.8M , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at HK$178.1M , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of 578’s operating efficiency ratios such as ROA here.
Can 578 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$1,731.1M liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.72x, which is below the prudent industry ratio of 3x.
Is 578’s debt level acceptable?
With total debt exceeding equities, 578 is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 578 is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
578’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 578 has company-specific issues impacting its capital structure decisions. You should continue to research Rosan Resources Holdings to get a better picture of the stock by looking at: