Investors are always looking for growth in small-cap stocks like China All Access (Holdings) Limited (HKG:633), with a market cap of HK$1.46b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Communications industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 633 here.
Does 633 produce enough cash relative to debt?
633’s debt levels have fallen from HK$2.81b to HK$2.04b over the last 12 months – this includes both the current and long-term debt. With this debt payback, 633 currently has HK$2.16b remaining in cash and short-term investments for investing into the business. Additionally, 633 has produced cash from operations of HK$927.79m over the same time period, leading to an operating cash to total debt ratio of 45.44%, indicating that 633’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 633’s case, it is able to generate 0.45x cash from its debt capital.
Can 633 meet its short-term obligations with the cash in hand?
With current liabilities at HK$2.83b, it seems that the business has been able to meet these obligations given the level of current assets of HK$6.40b, with a current ratio of 2.26x. Generally, for Communications companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can 633 service its debt comfortably?
With a debt-to-equity ratio of 51.16%, 633 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 633 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 633’s, case, the ratio of 3.15x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 633’s high interest coverage is seen as responsible and safe practice.
Although 633’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 633’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 633 has company-specific issues impacting its capital structure decisions. I recommend you continue to research China All Access (Holdings) to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 633’s future growth? Take a look at our free research report of analyst consensus for 633’s outlook.
- Valuation: What is 633 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 633 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.
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.