While small-cap stocks, such as Xinyi Solar Holdings Limited (HKG:968) with its market cap of HK$37b, 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into 968 here.
Does 968 Produce Much Cash Relative To Its Debt?
Over the past year, 968 has ramped up its debt from HK$7.9b to HK$8.8b – this includes long-term debt. With this increase in debt, 968 currently has HK$981m remaining in cash and short-term investments to keep the business going. Additionally, 968 has produced HK$2.3b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 26%, meaning that 968’s debt is appropriately covered by operating cash.
Can 968 pay its short-term liabilities?
At the current liabilities level of HK$6.7b, it appears that the company has been able to meet these obligations given the level of current assets of HK$6.8b, with a current ratio of 1.01x. The current ratio is the number you get when you divide current assets by current liabilities. For Semiconductor 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 968 face the risk of succumbing to its debt-load?
With debt reaching 73% of equity, 968 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. We can test if 968’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 968, the ratio of 9.95x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 968’s high interest coverage is seen as responsible and safe practice.
968’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure 968 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Xinyi Solar Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 968’s future growth? Take a look at our free research report of analyst consensus for 968’s outlook.
- Valuation: What is 968 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 968 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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.