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Hanwei Energy Services Corp. (TSE:HE) is a small-cap stock with a market capitalization of CA$3.9m. 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? Given that HE is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into HE here.
Does HE Produce Much Cash Relative To Its Debt?
Over the past year, HE has ramped up its debt from CA$3.9m to CA$5.2m made up of predominantly near term debt. With this rise in debt, the current cash and short-term investment levels stands at CA$797k , ready to be used for running the business. On top of this, HE has generated cash from operations of CA$2.9m during the same period of time, resulting in an operating cash to total debt ratio of 56%, indicating that HE’s operating cash is sufficient to cover its debt.
Does HE’s liquid assets cover its short-term commitments?
With current liabilities at CA$28m, the company may not be able to easily meet these obligations given the level of current assets of CA$8.4m, with a current ratio of 0.3x. The current ratio is the number you get when you divide current assets by current liabilities.
Can HE service its debt comfortably?
With debt reaching 46% of equity, HE may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since HE is currently loss-making, 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.
Next Steps:
Although HE’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. However, 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 HE has been performing in the past. I recommend you continue to research Hanwei Energy Services to get a more holistic view of the stock by looking at:
- 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.
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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.