Are Ausnutria Dairy Corporation Ltd’s (HKG:1717) Interest Costs Too High?
While small-cap stocks, such as Ausnutria Dairy Corporation Ltd (SEHK:1717) with its market cap of HK$5.85B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, 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. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into 1717 here.
Does 1717 generate enough cash through operations?
Over the past year, 1717 has ramped up its debt from CN¥948.1M to CN¥1,215.1M – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at CN¥546.5M , ready to deploy into the business. On top of this, 1717 has produced CN¥294.4M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 24.23%, signalling that 1717’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1717’s case, it is able to generate 0.24x cash from its debt capital.
Can 1717 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥1,828.6M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.39x. Usually, for Food companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1717 face the risk of succumbing to its debt-load?
1717 is a relatively highly levered company with a debt-to-equity of 81.90%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Next Steps:
At its current level of cash flow coverage, 1717 has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. This is only a rough assessment of financial health, and I’m sure 1717 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ausnutria Dairy to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for 1717’s future growth? Take a look at our free research report of analyst consensus for 1717’s outlook.
2. Valuation: What is 1717 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 1717 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 pass 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.
