Is AVIC International Holding (HK) Limited (HKG:232) A Financially Sound Company?

While small-cap stocks, such as AVIC International Holding (HK) Limited (HKG:232) with its market cap of HK$2.42b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 232 is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 232 here.

Does 232 produce enough cash relative to debt?

232 has shrunken its total debt levels in the last twelve months, from HK$1.94b to HK$1.43b , which comprises of short- and long-term debt. With this debt repayment, 232 currently has HK$791.07m remaining in cash and short-term investments for investing into the business. On top of this, 232 has produced cash from operations of HK$551.00m in the last twelve months, leading to an operating cash to total debt ratio of 38.62%, indicating that 232’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In 232’s case, it is able to generate 0.39x cash from its debt capital.

Can 232 meet its short-term obligations with the cash in hand?

At the current liabilities level of HK$980.98m liabilities, the company has been able to meet these commitments with a current assets level of HK$3.83b, leading to a 3.9x current account ratio. However, a ratio greater than 3x may be considered as too high, as 232 could be holding too much capital in a low-return investment environment.

Can 232 service its debt comfortably?

232 is a relatively highly levered company with a debt-to-equity of 62.79%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 232 is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

Although 232’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 232 has company-specific issues impacting its capital structure decisions. I recommend you continue to research AVIC International Holding (HK) to get a more holistic view of the small-cap by looking at:

1. Valuation: What is 232 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 232 is currently mispriced by the market.
2. Historical Performance: What has 232'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.
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.