While small-cap stocks, such as AVIC International Holdings Limited (HKG:161) with its market cap of HK$4.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 161 is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into 161 here.
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161’s Debt (And Cash Flows)
161 has sustained its debt level by about CN¥34b over the last 12 months – this includes long-term debt. At this current level of debt, 161's cash and short-term investments stands at CN¥8.5b to keep the business going. Additionally, 161 has produced CN¥2.1b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 6.1%, meaning that 161’s current level of operating cash is not high enough to cover debt.
Does 161’s liquid assets cover its short-term commitments?
At the current liabilities level of CN¥40b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.95x. The current ratio is calculated by dividing current assets by current liabilities.
Is 161’s debt level acceptable?
161 is a relatively highly levered company with a debt-to-equity of 88%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since 161 is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although 161’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure 161 has company-specific issues impacting its capital structure decisions. I recommend you continue to research AVIC International Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 161’s future growth? Take a look at our free research report of analyst consensus for 161’s outlook.
- Historical Performance: What has 161'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.
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