While small-cap stocks, such as China Auto Logistics Inc (NASDAQ:CALI) with its market cap of USD $9.72M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. See our latest analysis for CALI
Does CALI generate an acceptable amount of cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can CALI pay off what it owes to its debtholder by using only cash from its operational activities? In the case of CALI, operating cash flow turned out to be -0.05x its debt level over the past twelve months. This means what CALI can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at CALI’s operations at this point in time.
Does CALI’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, CALI could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that CALI is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Is CALI’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. CALI’s debt-to-equity ratio exceeds 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate.
Are you a shareholder? CALI’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may change. I suggest keeping abreast of market expectations for CALI’s future growth on our free analysis platform.
Are you a potential investor? CALI’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. As a following step, you should take a look at CALI’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.