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Xinyi Solar Holdings Limited (HKG:968): Time For A Financial Health Check

Simply Wall St

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While small-cap stocks, such as Xinyi Solar Holdings Limited (HKG:968) with its market cap of HK$35b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into 968 here.

968’s Debt (And Cash Flows)

Over the past year, 968 has ramped up its debt from HK$7.9b to HK$8.8b , which accounts for long term debt. With this increase in debt, 968's cash and short-term investments stands at HK$981m , ready to be used for running the business. On top of this, 968 has generated cash from operations of HK$2.3b over the same time period, leading to an operating cash to total debt ratio of 26%, indicating that 968’s current level of operating cash is high enough to cover debt.

Can 968 pay its short-term liabilities?

Looking at 968’s HK$6.7b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$6.8b, leading to a 1.01x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Semiconductor companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

SEHK:968 Historical Debt, June 18th 2019

Can 968 service its debt comfortably?

968 is a relatively highly levered company with a debt-to-equity of 73%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if 968’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 968, the ratio of 9.95x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 968’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although 968’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 968's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Xinyi Solar Holdings to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 968’s future growth? Take a look at our free research report of analyst consensus for 968’s outlook.
  2. Valuation: What is 968 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 968 is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.