Is Energy International Investments Holdings Limited (HKG:353) A Financially Sound Company?
Investors are always looking for growth in small-cap stocks like Energy International Investments Holdings Limited (HKG:353), with a market cap of HK$1.1b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 353 here.
How does 353’s operating cash flow stack up against its debt?
Over the past year, 353 has ramped up its debt from HK$497m to HK$709m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at HK$55m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 assess some of 353’s operating efficiency ratios such as ROA here.
Can 353 pay its short-term liabilities?
At the current liabilities level of HK$949m, it appears that the company may not be able to easily meet these obligations given the level of current assets of HK$135m, with a current ratio of 0.14x.
Can 353 service its debt comfortably?
Since total debt levels have outpaced equities, 353 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. Though, since 353 is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although 353’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, 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 353 has been performing in the past. You should continue to research Energy International Investments Holdings to get a more holistic view of the stock by looking at:
Historical Performance: What has 353’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 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.
