China Infrastructure & Logistics Group Ltd. (HKG:1719) is a small-cap stock with a market capitalization of HK$1.6b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into 1719 here.
1719’s Debt (And Cash Flows)
Over the past year, 1719 has reduced its debt from HK$606m to HK$487m – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at HK$42m , ready to be used for running the business. Moreover, 1719 has produced HK$131m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 27%, signalling that 1719’s current level of operating cash is high enough to cover debt.
Can 1719 pay its short-term liabilities?
Looking at 1719’s HK$580m in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.33x. The current ratio is the number you get when you divide current assets by current liabilities.
Is 1719’s debt level acceptable?
With a debt-to-equity ratio of 63%, 1719 can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if 1719’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 1719, the ratio of 2.41x 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.
Although 1719’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how 1719 has been performing in the past. I suggest you continue to research China Infrastructure & Logistics Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1719’s future growth? Take a look at our free research report of analyst consensus for 1719’s outlook.
- Valuation: What is 1719 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 1719 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.