How Financially Strong Is Grand Ocean Advanced Resources Company Limited (HKG:65)?
Investors are always looking for growth in small-cap stocks like Grand Ocean Advanced Resources Company Limited (HKG:65), with a market cap of HK$692m. However, an important fact which most ignore is: how financially healthy is the business? 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 vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 65 here.
Does 65 produce enough cash relative to debt?
65 has built up its total debt levels in the last twelve months, from HK$30m to HK$33m – this includes long-term debt. With this growth in debt, 65’s cash and short-term investments stands at HK$123m for investing into the business. On top of this, 65 has produced HK$14m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 41%, meaning that 65’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 65’s case, it is able to generate 0.41x cash from its debt capital.
Can 65 meet its short-term obligations with the cash in hand?
With current liabilities at HK$185m, it appears that the company may not be able to easily meet these obligations given the level of current assets of HK$143m, with a current ratio of 0.78x.
Is 65’s debt level acceptable?
With debt at 25% of equity, 65 may be thought of as appropriately levered. 65 is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with 65, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
65 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. However, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for 65’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Grand Ocean Advanced Resources to get a better picture of the stock by looking at:
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Valuation: What is 65 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 65 is currently mispriced by the market.
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Historical Performance: What has 65’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.