What You Must Know About Chinney Alliance Group Limited’s (HKG:385) Financial Strength
Investors are always looking for growth in small-cap stocks like Chinney Alliance Group Limited (HKG:385), with a market cap of HK$826.9m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 385 here.
How does 385’s operating cash flow stack up against its debt?
385’s debt level has been constant at around HK$210.1m over the previous year – this includes both the current and long-term debt. At this stable level of debt, 385’s cash and short-term investments stands at HK$778.2m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 385’s operating efficiency ratios such as ROA here.
Can 385 meet its short-term obligations with the cash in hand?
Looking at 385’s most recent HK$1.62b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.66x. Usually, for Construction companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can 385 service its debt comfortably?
385’s level of debt is appropriate relative to its total equity, at 11.8%. This range is considered safe as 385 is not taking on too much debt obligation, which may be constraining for future growth. We can test if 385’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 385, the ratio of 36.22x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 385 ample headroom to grow its debt facilities.
Next Steps:
Although 385’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 will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 385 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Chinney Alliance Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 385’s future growth? Take a look at our free research report of analyst consensus for 385’s outlook.
Historical Performance: What has 385’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
