While small-cap stocks, such as China Aerospace International Holdings Limited (HKG:31) with its market cap of HK$1.9b, 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. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into 31 here.
31’s Debt (And Cash Flows)
31 has built up its total debt levels in the last twelve months, from HK$1.2b to HK$1.4b , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$819m , ready to be used for running the business. Additionally, 31 has produced cash from operations of HK$185m during the same period of time, leading to an operating cash to total debt ratio of 13%, signalling that 31’s operating cash is less than its debt.
Does 31’s liquid assets cover its short-term commitments?
With current liabilities at HK$1.4b, it appears that the company has been able to meet these obligations given the level of current assets of HK$2.6b, with a current ratio of 1.88x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Electronic companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 31 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 16%, 31’s debt level may be seen as prudent. 31 is not taking on too much debt commitment, which may be constraining for future growth. 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.
31’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 31’s financial health. Other important fundamentals need to be considered alongside. You should continue to research China Aerospace International Holdings to get a more holistic view of the stock by looking at:
- 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.
- 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.
- 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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If you spot an error that warrants correction, please contact the editor at email@example.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.