While small-cap stocks, such as Zhengzhou Coal Mining Machinery Group Company Limited (HKG:564) with its market cap of HK$11b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 564 here.
How much cash does 564 generate through its operations?
564’s debt levels surged from CN¥1.1b to CN¥4.4b over the last 12 months , which includes long-term debt. With this growth in debt, 564’s cash and short-term investments stands at CN¥3.5b for investing into the business. Additionally, 564 has produced cash from operations of CN¥634m over the same time period, leading to an operating cash to total debt ratio of 14%, meaning that 564’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 564’s case, it is able to generate 0.14x cash from its debt capital.
Can 564 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥11b, it appears that the company has been able to meet these obligations given the level of current assets of CN¥18b, with a current ratio of 1.66x. For Machinery 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.
Does 564 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 36%, 564’s debt level may be seen as prudent. 564 is not taking on too much debt commitment, which may be constraining for future growth. We can test if 564’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 564, the ratio of 460x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 564’s high interest coverage is seen as responsible and safe practice.
564’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 564 has been performing in the past. You should continue to research Zhengzhou Coal Mining Machinery Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 564’s future growth? Take a look at our free research report of analyst consensus for 564’s outlook.
- Valuation: What is 564 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 564 is currently mispriced by the market.
- 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 firstname.lastname@example.org.