While small-cap stocks, such as EPI (Holdings) Limited (SEHK:689) with its market cap of HK$3.86B, 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, especially ones that are currently loss-making, are inclined towards being higher 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. However, this commentary is still very high-level, so I recommend you dig deeper yourself into 689 here.
Does 689 generate enough cash through operations?
689 has shrunken its total debt levels in the last twelve months, from HK$183.8M to HK$0.0M , which is made up of current and long term debt. With this debt repayment, 689’s cash and short-term investments stands at HK$211.0M , ready to deploy 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 take a look at some of 689’s operating efficiency ratios such as ROA here.
Does 689’s liquid assets cover its short-term commitments?
With current liabilities at HK$21.9M, it appears that the company has been able to meet these commitments with a current assets level of HK$325.1M, leading to a 14.85x current account ratio. However, a ratio greater than 3x may be considered as too high, as 689 could be holding too much capital in a low-return investment environment.
Is 689’s debt level acceptable?
With a debt-to-equity ratio of 20.71%, 689’s debt level may be seen as prudent. This range is considered safe as 689 is not taking on too much debt obligation, which may be constraining for future growth. 689’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
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689’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. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 689 has company-specific issues impacting its capital structure decisions. I suggest you continue to research EPI (Holdings) to get a more holistic view of the stock by looking at: