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While small-cap stocks, such as China Primary Energy Holdings Limited (HKG:8117) with its market cap of HK$727.0m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 8117 is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into 8117 here.
Does 8117 produce enough cash relative to debt?
8117’s debt levels have fallen from HK$103.9m to HK$53.0m over the last 12 months – this includes both the current and long-term debt. With this debt payback, 8117 currently has HK$25.0m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 8117’s operating efficiency ratios such as ROA here.
Can 8117 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$157.2m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.07x. Generally, for Gas Utilities companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does 8117 face the risk of succumbing to its debt-load?
8117’s level of debt is appropriate relative to its total equity, at 13.6%. 8117 is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for 8117, and the company also has the ability and headroom to increase debt if needed going forward.
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8117’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 8117 has been performing in the past. You should continue to research China Primary Energy Holdings to get a better picture of the stock by looking at: