What does China Advanced Construction Materials Group Inc’s (NASDAQ:CADC) Balance Sheet Tell Us About Its Future?
China Advanced Construction Materials Group Inc (NASDAQ:CADC) is a small-cap stock with a market capitalization of US$7.88M. 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 vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into CADC here.
Does CADC generate enough cash through operations?
CADC’s debt levels have fallen from US$34.91M to US$32.18M over the last 12 months , which is mainly comprised of near term debt. With this reduction in debt, CADC currently has US$224.68K remaining in cash and short-term investments for investing into the business. On top of this, 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 current level of operating cash is not high enough to cover 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.
Does CADC’s liquid assets cover its short-term commitments?
At the current liabilities level of US$69.23M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$76.73M, with a current ratio of 1.11x. For Basic Materials companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CADC’s case, the ratio of 1.73x 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.
Next Steps:
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 an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure CADC has company-specific issues impacting its capital structure decisions. I suggest you continue to research China Advanced Construction Materials Group to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.
1. Valuation: What is CADC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in this free research report helps visualize whether CADC is currently mispriced by the market.
2. 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 CADC’s historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore a 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.
