Is Orient Paper Inc’s (NYSEMKT:ONP) Balance Sheet Strong Enough To Weather A Storm?
While small-cap stocks, such as Orient Paper Inc (AMEX:ONP) with its market cap of US$24.24M, 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’d encourage you to dig deeper yourself into ONP here.
How does ONP’s operating cash flow stack up against its debt?
ONP’s debt levels have fallen from US$28.82M to US$25.53M over the last 12 months , which comprises of short- and long-term debt. With this debt payback, ONP currently has US$2.90M remaining in cash and short-term investments for investing into the business. Moreover, ONP has generated cash from operations of US$18.15M during the same period of time, leading to an operating cash to total debt ratio of 71.11%, meaning that ONP’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 ONP’s case, it is able to generate 0.71x cash from its debt capital.
Does ONP’s liquid assets cover its short-term commitments?
Looking at ONP’s most recent US$21.76M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.92x, which is below the prudent industry ratio of 3x.
Can ONP service its debt comfortably?
With a debt-to-equity ratio of 13.77%, ONP’s debt level may be seen as prudent. This range is considered safe as ONP is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether ONP 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 ONP’s, case, the ratio of 3.6x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ONP’s high interest coverage is seen as responsible and safe practice.
Next Steps:
ONP’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially if meeting short-term obligations could also bring about issues. Keep in mind I haven’t considered other factors such as how ONP has been performing in the past. You should continue to research Orient Paper to get a more holistic view of the stock by looking at:
Valuation: What is ONP 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 ONP is currently mispriced by the market.
Historical Performance: What has ONP’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.
