Is China All Access (Holdings) Limited's (HKG:633) Balance Sheet Strong Enough To Weather A Storm?

While small-cap stocks, such as China All Access (Holdings) Limited (HKG:633) with its market cap of HK$650m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Communications industry, even ones that are profitable, are inclined towards being higher risk. So, understanding the company's financial health becomes essential. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into 633 here.

Does 633 produce enough cash relative to debt?

633 has shrunken its total debt levels in the last twelve months, from CN¥2.4b to CN¥1.5b , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at CN¥2.3b for investing into the business. Additionally, 633 has generated CN¥1.2b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 81%, signalling that 633’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 633’s case, it is able to generate 0.81x cash from its debt capital.

Can 633 meet its short-term obligations with the cash in hand?

Looking at 633’s CN¥2.2b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥5.5b, leading to a 2.46x current account ratio. For Communications companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is 633’s debt level acceptable?

With debt at 39% of equity, 633 may be thought of as appropriately levered. 633 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 633 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 633's, case, the ratio of 4.79x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 633’s high interest coverage is seen as responsible and safe practice.

Next Steps:

633’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how 633 has been performing in the past. I recommend you continue to research China All Access (Holdings) to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 633’s future growth? Take a look at our free research report of analyst consensus for 633’s outlook.
2. Valuation: What is 633 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 633 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.

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.