With Chinese small stocks making news for all the wrong reasons these days, it's tempting to categorize them all under a single umbrella: The Not-Worth-It umbrella. Are things different for L&L Energy
Its history and performance
The company is engaged in coal mining, washing, and distribution in China. Following investigations into another Chinese coal company, Puda Coal
With regards to performance, the $214 million company has done especially well in the past two years. With China's huge demand for coal, this does not come as a surprise. The demand for coal is fueled by the exploding infrastructure sector, since production of steel and iron requires coking coal. A recent example is L&L Energy's deal for two purchase contracts to supply 700,000 tons of coal to Kunming Iron & Steel Group.
Revenues grew by 150%, to $212.7 million, in 2010, and this follows revenue growth of 167% the previous year. L&L also managed to convert its revenues into net income by posting a healthy 22.7% net margin during the same period.
Fundamentally speaking, this looks good. Return on equity (ROE), which investors look for to check the company's profitability, is again an extremely healthy 49%. Compare that with Yanzhou Coal Mining's
However, one flaw that caught my attention is the negative free cash flow (FCF) of $35.8 million. This is not bad in itself. A few weeks back, Joseph Kruse mentioned that a negative free cash flow for this company does not mean much since it is a "growth company," and that L&L is trying to grow organically by reinvesting its earnings. However, the big question is whether the company will be able to sustain the growth it has showed in the past couple of years. Foolish investors must watch this company's growth closely.
Foolish bottom line
L&L has managed to do a good job so far. If it continues in the same vein, there is no real need to worry. Management most definitely looks sounder than that of Puda. In fact, it has taken special efforts to be more transparent in its dealings. Given the general air surrounding companies whose operations are based out of China, this calls for greater accountability, and management seems to be up to the job.
Isac Simon does not own shares of any of the companies mentioned in this article.
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