Highpower International Inc (NASDAQ:HPJ) is a small-cap stock with a market capitalization of US$49.01m. 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? So, understanding the company’s financial health becomes crucial, 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, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into HPJ here.
How much cash does HPJ generate through its operations?
Over the past year, HPJ has ramped up its debt from US$53.18m to US$75.74m , which is mainly comprised of near term debt. With this increase in debt, HPJ currently has US$14.50m 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. 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 HPJ’s operating efficiency ratios such as ROA here.
Does HPJ’s liquid assets cover its short-term commitments?
At the current liabilities level of US$152.27m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$155.98m, with a current ratio of 1.02x. Usually, for Electrical companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is HPJ’s debt level acceptable?
Since total debt levels have outpaced equities, HPJ 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. We can check to see whether HPJ 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 HPJ’s, case, the ratio of 9.82x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as HPJ’s high interest coverage is seen as responsible and safe practice.
HPJ’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 an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure HPJ has company-specific issues impacting its capital structure decisions. I suggest you continue to research Highpower International to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HPJ’s future growth? Take a look at our free research report of analyst consensus for HPJ’s outlook.
- Historical Performance: What has HPJ’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.
To help readers see pass 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.