Investors are always looking for growth in small-cap stocks like China Glass Holdings Limited (HKG:3300), with a market cap of HK$977m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into 3300 here.
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3300’s Debt (And Cash Flows)
3300’s debt levels surged from CN¥2.5b to CN¥2.9b over the last 12 months – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at CN¥607m to keep the business going. On top of this, 3300 has produced cash from operations of CN¥296m in the last twelve months, leading to an operating cash to total debt ratio of 10%, signalling that 3300’s debt is not covered by operating cash.
Can 3300 pay its short-term liabilities?
With current liabilities at CN¥3.9b, it appears that the company may not be able to easily meet these obligations given the level of current assets of CN¥1.9b, with a current ratio of 0.5x. The current ratio is the number you get when you divide current assets by current liabilities.
Can 3300 service its debt comfortably?
With total debt exceeding equity, 3300 is considered a highly levered company. 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 3300’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 3300, the ratio of 1.05x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 3300’s low interest coverage already puts the company at higher risk of default.
3300’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how 3300 has been performing in the past. I recommend you continue to research China Glass Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 3300’s future growth? Take a look at our free research report of analyst consensus for 3300’s outlook.
- Historical Performance: What has 3300’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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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