What Investors Should Know About AVIC International Holding (HK) Limited's (HKG:232) Financial Strength
AVIC International Holding (HK) Limited (HKG:232) is a small-cap stock with a market capitalization of HK$1.7b. 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? Since 232 is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 232 here.
How does 232’s operating cash flow stack up against its debt?
Over the past year, 232 has reduced its debt from HK$1.7b to HK$554m – this includes both the current and long-term debt. With this debt repayment, 232's cash and short-term investments stands at HK$328m , ready to deploy into the business. On top of this, 232 has produced HK$211m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 38%, indicating that 232’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In 232’s case, it is able to generate 0.38x cash from its debt capital.
Can 232 pay its short-term liabilities?
Looking at 232’s most recent HK$3.3b liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.44x. 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.
Does 232 face the risk of succumbing to its debt-load?
232’s level of debt is appropriate relative to its total equity, at 15%. This range is considered safe as 232 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is very low for 232, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
232 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure 232 has company-specific issues impacting its capital structure decisions. I suggest you continue to research AVIC International Holding (HK) to get a better picture of the stock by looking at:
- 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.
- 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.
- 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
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.