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Yuhua Energy Holdings Limited (SEHK:2728) is a small-cap stock with a market capitalization of HK$2.04B. 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? Oil and Gas companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. 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 suggest you dig deeper yourself into 2728 here.
How does 2728’s operating cash flow stack up against its debt?
Over the past year, 2728 has ramped up its debt from HK$137.29M to HK$278.37M , which is mainly comprised of near term debt. With this growth in debt, 2728 currently has HK$54.67M 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 2728’s operating efficiency ratios such as ROA here.
Can 2728 pay its short-term liabilities?
Looking at 2728’s most recent HK$562.66M liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$810.44M, leading to a 1.44x current account ratio. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can 2728 service its debt comfortably?
2728 is a relatively highly levered company with a debt-to-equity of 77.72%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 2728’s case, the ratio of 9.32x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 2728 ample headroom to grow its debt facilities.
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At its current level of cash flow coverage, 2728 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 2728’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Yuhua Energy Holdings to get a better picture of the stock by looking at: