Yahoo Finance Tianneng Power International Limited (HKG:819): Time For A Financial Health Check
Tianneng Power International Limited (HKG:819) is a small-cap stock with a market capitalization of HK$14.31b. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to 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. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 819 here.
Does 819 produce enough cash relative to debt?
819 has built up its total debt levels in the last twelve months, from HK$2.01b to HK$0 , which is made up of current and long term debt. With this growth in debt, 819’s cash and short-term investments stands at HK$3.87b , ready to deploy into the business. Moreover, 819 has generated HK$2.20b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 98.63%, signalling that 819’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 819’s case, it is able to generate 0.99x cash from its debt capital.
Can 819 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$7.94b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$9.15b, with a current ratio of 1.15x. For Auto Components companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is 819’s debt level acceptable?
With debt reaching 44.10% of equity, 819 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 819’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 819, the ratio of 15.6x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 819’s high interest coverage is seen as responsible and safe practice.
Next Steps:
819’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 819’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 819 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Tianneng Power International to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 819’s future growth? Take a look at our free research report of analyst consensus for 819’s outlook.
Valuation: What is 819 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 819 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 pass 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
