Investors are always looking for growth in small-cap stocks like China Auto Logistics Inc (NASDAQ:CALI), with a market cap of US$12.92M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Specialty Retail industry facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into CALI here.
How does CALI’s operating cash flow stack up against its debt?
CALI has shrunken its total debt levels in the last twelve months, from US$143.15M to US$61.59M made up of predominantly near term debt. With this debt repayment, CALI currently has US$3.00M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of CALI’s operating efficiency ratios such as ROA here.
Can CALI meet its short-term obligations with the cash in hand?
Looking at CALI’s most recent US$136.65M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$160.22M, with a current ratio of 1.17x. Usually, for Specialty Retail companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can CALI service its debt comfortably?
Since total debt levels have outpaced equities, CALI is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since CALI is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
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, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how CALI has been performing in the past. I recommend you continue to research China Auto Logistics to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has CALI’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.
- 2. 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.