Is China Aerospace International Holdings Limited’s (HKG:31) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like China Aerospace International Holdings Limited (HKG:31), with a market cap of HK$1.6b. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 31 here.

Does 31 produce enough cash relative to debt?

31’s debt levels surged from HK$1.2b to HK$1.4b over the last 12 months , which includes long-term debt. With this rise in debt, 31 currently has HK$819m remaining in cash and short-term investments for investing into the business. Moreover, 31 has produced cash from operations of HK$185m in the last twelve months, leading to an operating cash to total debt ratio of 13%, indicating that 31’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 31’s case, it is able to generate 0.13x cash from its debt capital.

Does 31’s liquid assets cover its short-term commitments?

Looking at 31’s HK$1.4b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$2.6b, leading to a 1.88x current account ratio. For Electronic companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

SEHK:31 Historical Debt December 5th 18
SEHK:31 Historical Debt December 5th 18

Is 31’s debt level acceptable?

With debt at 16% of equity, 31 may be thought of as appropriately levered. 31 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if 31’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 31, the ratio of 10.43x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

31 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 31 has company-specific issues impacting its capital structure decisions. I recommend you continue to research China Aerospace International Holdings to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 31’s future growth? Take a look at our free research report of analyst consensus for 31’s outlook.
  2. Historical Performance: What has 31’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.

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.