Is CNQC International Holdings Limited’s (HKG:1240) Balance Sheet A Threat To Its Future?

While small-cap stocks, such as CNQC International Holdings Limited (HKG:1240) with its market cap of HK$2.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes essential, since poor capital management may bring about 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, these checks don’t give you a full picture, so I suggest you dig deeper yourself into 1240 here.

1240’s Debt (And Cash Flows)

1240’s debt levels have fallen from HK$5.0b to HK$4.1b over the last 12 months – this includes long-term debt. With this reduction in debt, 1240 currently has HK$1.6b remaining in cash and short-term investments to keep the business going. Moreover, 1240 has produced HK$56m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 1.4%, signalling that 1240’s debt is not covered by operating cash.

Does 1240’s liquid assets cover its short-term commitments?

With current liabilities at HK$4.0b, it appears that the company has been able to meet these commitments with a current assets level of HK$6.8b, leading to a 1.71x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Real Estate companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

SEHK:1240 Historical Debt, April 20th 2019
SEHK:1240 Historical Debt, April 20th 2019

Can 1240 service its debt comfortably?

With total debt exceeding equity, 1240 is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses.

Next Steps:

1240’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 1240 has company-specific issues impacting its capital structure decisions. I recommend you continue to research CNQC International Holdings to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 1240’s future growth? Take a look at our free research report of analyst consensus for 1240’s outlook.
  2. Valuation: What is 1240 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 1240 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.

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 editorial-team@simplywallst.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.