Investors are always looking for growth in small-cap stocks like China Advanced Construction Materials Group Inc (NASDAQ:CADC), with a market cap of US$17.65M. However, an important fact which most ignore is: how financially healthy is the business? 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. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into CADC here.
Does CADC generate an acceptable amount of cash through operations?
Over the past year, CADC has reduced its debt from US$34.91M to US$32.18M . With this reduction in debt, CADC’s cash and short-term investments stands at US$224.68K for investing into the business. Moreover, CADC has produced US$1.70M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 5.29%, meaning that CADC’s operating cash is not sufficient to cover its debt. 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 pay its short-term liabilities?
Looking at CADC’s most recent US$69.23M liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$76.73M, leading to a 1.11x current account ratio. Generally, for Basic Materials companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can CADC service its debt comfortably?
Since total debt levels have outpaced equities, CADC is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether CADC 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 CADC’s, case, the ratio of 1.54x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
CADC’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for CADC’s financial health. Other important fundamentals need to be considered alongside. You should 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.
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.