Hidili Industry International Development Limited (SEHK:1393) is a small-cap stock with a market capitalization of HK$472.53M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the oil and gas industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 1393 here.
How does 1393’s operating cash flow stack up against its debt?
1393 has shrunken its total debt levels in the last twelve months, from CN¥7,671.1M to CN¥7,256.9M , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at CN¥22.2M for investing into the business. Though 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 1393’s operating efficiency ratios such as ROA here.
Can 1393 pay its short-term liabilities?
At the current liabilities level of CN¥8,806.2M liabilities, the company has not been able to meet these commitments with a current assets level of CN¥660.6M, leading to a 0.08x current account ratio. which is under the appropriate industry ratio of 3x.
Is 1393’s level of debt at an acceptable level?
Since total debt levels have outpaced equities, 1393 is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since 1393 is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? 1393’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, its financial position may be different. You should always be keeping on top of market expectations for 1393’s future growth on our free analysis platform.