Is Asiainfo Technologies Limited (HKG:1675) A Financially Sound Company?
Investors are always looking for growth in small-cap stocks like Asiainfo Technologies Limited (HKG:1675), with a market cap of HK$7.1b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into 1675 here.
Does 1675 Produce Much Cash Relative To Its Debt?
Over the past year, 1675 has reduced its debt from CN¥2.3b to CN¥1.8b , which also accounts for long term debt. With this reduction in debt, 1675 currently has CN¥633m remaining in cash and short-term investments , ready to be used for running the business. Additionally, 1675 has generated CN¥1.0b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 57%, indicating that 1675’s debt is appropriately covered by operating cash.
Does 1675’s liquid assets cover its short-term commitments?
With current liabilities at CN¥4.5b, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.81x. The current ratio is the number you get when you divide current assets by current liabilities.
Does 1675 face the risk of succumbing to its debt-load?
1675 is a relatively highly levered company with a debt-to-equity of 81%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether 1675 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 1675’s, case, the ratio of 19.02x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1675 ample headroom to grow its debt facilities.
Next Steps:
1675’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how 1675 has been performing in the past. I suggest you continue to research Asiainfo Technologies to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1675’s future growth? Take a look at our free research report of analyst consensus for 1675’s outlook.
Valuation: What is 1675 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 1675 is currently mispriced by the market.
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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