How Financially Strong Is GCL New Energy Holdings Limited (HKG:451)?

GCL New Energy Holdings Limited (SEHK:451) is a small-cap stock with a market capitalization of HK$11.63B. 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 vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 451 here.

Does 451 generate an acceptable amount of cash through operations?

451's debt levels surged from CN¥13,694.3M to CN¥22,635.8M over the last 12 months , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at CN¥3,826.5M , ready to deploy into the business. On top of this, 451 has produced CN¥450.2M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 1.99%, meaning that 451’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 451’s case, it is able to generate 0.02x cash from its debt capital.

Can 451 pay its short-term liabilities?

Looking at 451’s most recent CN¥18,017.4M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.6x, which is below the prudent industry ratio of 3x.

Does 451 face the risk of succumbing to its debt-load?

With total debt exceeding equities, 451 is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if 451’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 451, the ratio of 1.62x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

451’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may not 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 451 has been performing in the past. I suggest you continue to research GCL New Energy Holdings to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 451’s future growth? Take a look at our free research report of analyst consensus for 451’s outlook.

2. Valuation: What is 451 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 451 is currently mispriced by the market.

3. 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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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.