Investors are always looking for growth in small-cap stocks like Hanwei Energy Services Corp (TSE:HE), with a market cap of CA$5m. However, an important fact which most ignore is: how financially healthy is the business? Energy Services companies, in particular ones that run negative earnings, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into HE here.
How much cash does HE generate through its operations?
Over the past year, HE has ramped up its debt from CA$4m to CA$6m . With this increase in debt, HE’s cash and short-term investments stands at CA$868k , ready to deploy into the business. On top of this, HE has generated CA$4m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 55%, indicating that HE’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In HE’s case, it is able to generate 0.55x cash from its debt capital.
Does HE’s liquid assets cover its short-term commitments?
At the current liabilities level of CA$30m liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.36x.
Is HE’s debt level acceptable?
HE is a relatively highly levered company with a debt-to-equity of 52%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since HE is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
HE’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how HE has been performing in the past. You should continue to research Hanwei Energy Services to get a better picture of the stock by looking at:
- Valuation: What is HE 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 HE is currently mispriced by the market.
- Historical Performance: What has HE’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 email@example.com.