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While small-cap stocks, such as China XD Plastics Company Limited (NASDAQ:CXDC) with its market cap of US$108m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into CXDC here.
Does CXDC Produce Much Cash Relative To Its Debt?
CXDC has built up its total debt levels in the last twelve months, from US$820m to US$928m , which accounts for long term debt. With this growth in debt, CXDC currently has US$79m remaining in cash and short-term investments , ready to be used for running the business. On top of this, CXDC has produced US$100m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 11%, signalling that CXDC’s current level of operating cash is not high enough to cover debt.
Can CXDC meet its short-term obligations with the cash in hand?
Looking at CXDC’s US$1.6b in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of US$1.5b, with a current ratio of 0.96x. The current ratio is the number you get when you divide current assets by current liabilities.
Does CXDC face the risk of succumbing to its debt-load?
With total debt exceeding equity, CXDC is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CXDC's case, the ratio of 1.95x 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.
CXDC’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. Though 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 CXDC has been performing in the past. I recommend you continue to research China XD Plastics to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CXDC’s future growth? Take a look at our free research report of analyst consensus for CXDC’s outlook.
- Historical Performance: What has CXDC'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.
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.