Is Henan Jinma Energy Company Limited’s (HKG:6885) Balance Sheet A Threat To Its Future?
While small-cap stocks, such as Henan Jinma Energy Company Limited (HKG:6885) with its market cap of HK$2.2b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into 6885 here.
How does 6885’s operating cash flow stack up against its debt?
6885 has built up its total debt levels in the last twelve months, from CN¥721m to CN¥945m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at CN¥1.7b , ready to deploy into the business. On top of this, 6885 has generated CN¥594m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 63%, signalling that 6885’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 6885’s case, it is able to generate 0.63x cash from its debt capital.
Can 6885 pay its short-term liabilities?
At the current liabilities level of CN¥1.4b, it seems that the business has been able to meet these obligations given the level of current assets of CN¥2.2b, with a current ratio of 1.54x. For Metals and Mining companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can 6885 service its debt comfortably?
With a debt-to-equity ratio of 49%, 6885 can be considered as an above-average leveraged company. 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 6885’s case, the ratio of 24.8x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 6885 ample headroom to grow its debt facilities.
Next Steps:
Although 6885’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 6885’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Henan Jinma Energy to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 6885’s future growth? Take a look at our free research report of analyst consensus for 6885’s outlook.
Valuation: What is 6885 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 6885 is currently mispriced by the market.
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.
