While small-cap stocks, such as Agritrade Resources Limited (HKG:1131) with its market cap of HK$10.4b, 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, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into 1131 here.
Does 1131 produce enough cash relative to debt?
1131 has shrunken its total debt levels in the last twelve months, from HK$1.0b to HK$699m , which comprises of short- and long-term debt. With this debt payback, 1131’s cash and short-term investments stands at HK$457m for investing into the business. Additionally, 1131 has produced HK$1.0b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 145%, indicating that 1131’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1131’s case, it is able to generate 1.45x cash from its debt capital.
Can 1131 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$941m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.29x. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1131 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 12%, 1131’s debt level may be seen as prudent. 1131 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 1131 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1131’s, case, the ratio of 12.76x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1131 ample headroom to grow its debt facilities.
Next Steps:
1131 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 1131’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Agritrade Resources to get a better picture of the stock by looking at: