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While small-cap stocks, such as Hilong Holding Limited (HKG:1623) with its market cap of HK$1.8b, 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 Energy Services industry, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 1623 here.
How does 1623’s operating cash flow stack up against its debt?
Over the past year, 1623 has maintained its debt levels at around CN¥2.9b made up of current and long term debt. At this current level of debt, 1623 currently has CN¥825m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of 1623’s operating efficiency ratios such as ROA here.
Does 1623’s liquid assets cover its short-term commitments?
With current liabilities at CN¥1.7b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.43x. Usually, for Energy Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 1623’s debt level acceptable?
With debt reaching 83% of equity, 1623 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 1623’s case, the ratio of 2.08x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
1623’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 1623 has been performing in the past. I recommend you continue to research Hilong Holding to get a better picture of the stock by looking at: