While small-cap stocks, such as ChinaCache International Holdings Ltd (NASDAQ:CCIH) with its market cap of USD $30.16M, 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. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. Check out our latest analysis for ChinaCache International Holdings
Does CCIH generate an acceptable amount of cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can CCIH pay off what it owes to its debtholder by using only cash from its operational activities? In the case of CCIH, operating cash flow over the past twelve months do cover its current debt, which means CCIH generates enough money in a year through its operations to pay off its near-term debt. Hence, debt poses a virtually insignificant risk for the company. This reflects proper cash and debt management by the company – great news for both debtholders and shareholders.
Can CCIH pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, CCIH 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 CCIH does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is CCIH’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. CCIH’s debt-to-equity ratio stands at 54.44%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level.
Are you a shareholder? CCIH’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its low liquidity raises concerns over whether short term obligations can be met in time, and increasing debt funding to meet these needs could prove difficult. Moving forward, its financial position may change. You should always be keeping on top of market expectations for CCIH’s future growth on our free analysis platform.
Are you a potential investor? CCIH’s high debt level shouldn’t scare off investors just yet. Its operating cash flow seems adequate to meet obligations which means its debt is being put to good use. Though, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. In order to build your conviction in the stock, you need to further examine CCIH’s track record. You should continue your analysis by taking a look at CCIH’s past performance analysis on our free platform to conclude on CCIH’s financial health.
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.