China Zenix Auto International Limited (NYSE:ZX) is a small-cap stock with a market capitalization of US$73.82M. 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? 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into ZX here.
Does ZX generate enough cash through operations?
Over the past year, ZX has maintained its debt levels at around CN¥566.74M . At this constant level of debt, ZX currently has CN¥1.04B remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of ZX’s operating efficiency ratios such as ROA here.
Can ZX meet its short-term obligations with the cash in hand?
Looking at ZX’s most recent CN¥1.21B liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥2.16B, with a current ratio of 1.8x. Usually, for Auto Components companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ZX face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 22.26%, ZX’s debt level may be seen as prudent. ZX is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether ZX 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 ZX’s, case, the ratio of 1.95x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ZX’s low interest coverage already puts the company at higher risk of default.
Although ZX’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how ZX has been performing in the past. You should continue to research China Zenix Auto International to get a more holistic view of the stock by looking at:
- Historical Performance: What has ZX’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.