China Advanced Construction Materials Group Inc (NASDAQ:CADC) is a small-cap stock with a market capitalization of US$16.70m. 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? So, 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. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into CADC here.
Does CADC produce enough cash relative to debt?
CADC has shrunken its total debt levels in the last twelve months, from US$34.91m to US$32.18m , which is mainly comprised of near term debt. With this reduction in debt, CADC currently has US$224.68k remaining in cash and short-term investments , ready to deploy into the business. On top of this, CADC has generated cash from operations of US$1.70m in the last twelve months, leading to an operating cash to total debt ratio of 5.29%, meaning that CADC’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 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?
At the current liabilities level of US$69.23m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.11x. Generally, for Basic Materials companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can CADC service its debt comfortably?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. We can test if CADC’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 CADC, the ratio of 1.54x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
At its current level of cash flow coverage, CADC has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how CADC has been performing in the past. I suggest you continue to research China Advanced Construction Materials Group to get a more holistic view of the stock by looking at:
- Historical Performance: What has CADC’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.