Is China Advanced Construction Materials Group Inc’s (NASDAQ:CADC) Balance Sheet Strong Enough To Weather A Storm?

China Advanced Construction Materials Group Inc (NASDAQ:CADC) is a small-cap stock with a market capitalization of US$7.88M. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into CADC here.

How does CADC’s operating cash flow stack up against its debt?

Over the past year, CADC has reduced its debt from US$34.91M to US$32.18M . With this debt payback, CADC currently has US$224.68K remaining in cash and short-term investments for investing into the business. On top of this, CADC has generated US$1.70M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 5.29%, indicating that CADC’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CADC’s case, it is able to generate 0.053x cash from its debt capital.

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

Looking at CADC’s most recent US$69.23M 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 1.11x. For Basic Materials companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NasdaqCM:CADC Historical Debt Mar 1st 18
NasdaqCM:CADC Historical Debt Mar 1st 18

Does CADC face the risk of succumbing to its debt-load?

CADC is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CADC’s case, the ratio of 1.73x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

At its current level of cash flow coverage, CADC has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure CADC has company-specific issues impacting its capital structure decisions. I suggest you continue to research China Advanced Construction Materials Group to get a better picture of the stock by looking at: