While small-cap stocks, such as Jinchuan Group International Resources Co Ltd (HKG:2362) with its market cap of HK$9.3b, 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 2362 here.
How does 2362’s operating cash flow stack up against its debt?
Over the past year, 2362 has maintained its debt levels at around US$471m made up of current and long term debt. At this constant level of debt, 2362 currently has US$105m remaining in cash and short-term investments for investing into the business. Additionally, 2362 has generated US$87m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 18%, indicating that 2362’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 2362’s case, it is able to generate 0.18x cash from its debt capital.
Can 2362 pay its short-term liabilities?
At the current liabilities level of US$368m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$510m, leading to a 1.39x current account ratio. For Metals and Mining companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can 2362 service its debt comfortably?
With debt reaching 49% of equity, 2362 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if 2362’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 2362, the ratio of 14.41x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 2362’s high interest coverage is seen as responsible and safe practice.
2362’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 2362’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Jinchuan Group International Resources to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 2362’s future growth? Take a look at our free research report of analyst consensus for 2362’s outlook.
- Valuation: What is 2362 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 2362 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.
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