Investors are always looking for growth in small-cap stocks like Zhengzhou Coal Mining Machinery Group Company Limited (HKG:564), with a market cap of HK$11b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 564 here.
Does 564 produce enough cash relative to debt?
Over the past year, 564 has ramped up its debt from CN¥1.1b to CN¥4.4b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at CN¥3.5b for investing into the business. Moreover, 564 has generated CN¥634m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 14%, meaning that 564’s debt is not appropriately covered by operating cash. 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.
Does 564’s liquid assets cover its short-term commitments?
With current liabilities at CN¥11b, the company has been able to meet these commitments with a current assets level of CN¥18b, leading to a 1.66x current account ratio. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
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. This range is considered safe as 564 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 564 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 564’s, case, the ratio of 460x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 564 ample headroom to grow its debt facilities.
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 exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 564’s financial health. Other important fundamentals need to be considered alongside. I suggest you 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.
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