Is Sino Oil and Gas Holdings Limited’s (HKG:702) Balance Sheet Strong Enough To Weather A Storm?
Sino Oil and Gas Holdings Limited (HKG:702) is a small-cap stock with a market capitalization of HK$563.5m. 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? Oil and Gas companies, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 702 here.
Does 702 produce enough cash relative to debt?
702’s debt levels surged from HK$1.59b to HK$1.76b over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, 702’s cash and short-term investments stands at HK$149.3m 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 assess some of 702’s operating efficiency ratios such as ROA here.
Does 702’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$768.8m liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.82x, which is below the prudent industry ratio of 3x.
Is 702’s debt level acceptable?
With a debt-to-equity ratio of 57.3%, 702 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 702 is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
702’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure 702 has company-specific issues impacting its capital structure decisions. You should continue to research Sino Oil and Gas Holdings to get a more holistic view of the stock by looking at:
Historical Performance: What has 702’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.
