China Nonferrous Mining Corporation Limited (HKG:1258) is a small-cap stock with a market capitalization of HK$7.5b. 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? Assessing first and foremost the financial health is crucial, 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, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into 1258 here.
1258’s Debt (And Cash Flows)
1258 has shrunk its total debt levels in the last twelve months, from US$1.3b to US$1.1b , which includes long-term debt. With this debt payback, 1258’s cash and short-term investments stands at US$505m to keep the business going. On top of this, 1258 has generated cash from operations of US$206m over the same time period, leading to an operating cash to total debt ratio of 19%, indicating that 1258’s current level of operating cash is not high enough to cover debt.
Can 1258 pay its short-term liabilities?
At the current liabilities level of US$922m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.52x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Metals and Mining companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 1258 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 82%, 1258 can be considered as an above-average leveraged company. 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 1258’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 1258, the ratio of 16.43x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as 1258’s high interest coverage is seen as responsible and safe practice.
1258’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 1258’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 1258 has company-specific issues impacting its capital structure decisions. I suggest you continue to research China Nonferrous Mining to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1258’s future growth? Take a look at our free research report of analyst consensus for 1258’s outlook.
- Historical Performance: What has 1258’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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