How Financially Strong Is Beijing Jingneng Clean Energy Co., Limited (HKG:579)?
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Beijing Jingneng Clean Energy Co., Limited (HKG:579) is a small-cap stock with a market capitalization of HK$15b. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 579 here.
Does 579 produce enough cash relative to debt?
579’s debt level has been constant at around CN¥26b over the previous year including long-term debt. At this stable level of debt, 579 currently has CN¥3.4b remaining in cash and short-term investments , ready to deploy into the business. On top of this, 579 has generated cash from operations of CN¥4.9b during the same period of time, leading to an operating cash to total debt ratio of 19%, signalling that 579’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 579’s case, it is able to generate 0.19x cash from its debt capital.
Does 579’s liquid assets cover its short-term commitments?
Looking at 579’s CN¥17b in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of CN¥10b, leading to a current ratio of 0.59x.
Can 579 service its debt comfortably?
Since total debt levels have outpaced equities, 579 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether 579 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 579’s, case, the ratio of 3.36x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 579’s high interest coverage is seen as responsible and safe practice.
Next Steps:
579’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how 579 has been performing in the past. I recommend you continue to research Beijing Jingneng Clean Energy to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 579’s future growth? Take a look at our free research report of analyst consensus for 579’s outlook.
Historical Performance: What has 579’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.
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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
