Investors are always looking for growth in small-cap stocks like Xinyuan Real Estate Co Ltd. (NYSE:XIN), with a market cap of US$425.64M. 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into XIN here.
Does XIN generate an acceptable amount of cash through operations?
XIN’s debt levels surged from US$1.75B to US$2.14B over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, XIN’s cash and short-term investments stands at US$617.55M for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of XIN’s operating efficiency ratios such as ROA here.
Can XIN meet its short-term obligations with the cash in hand?
At the current liabilities level of US$2.06B liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$3.93B, with a current ratio of 1.91x. For Real Estate 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 XIN service its debt comfortably?
Since total debt levels have outpaced equities, XIN 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 XIN’s case, the ratio of 6.16x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving XIN ample headroom to grow its debt facilities.
XIN’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. Though, 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 XIN has company-specific issues impacting its capital structure decisions. You should continue to research Xinyuan Real Estate to get a better picture of the stock by looking at:
- 1. Historical Performance: What has XIN’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.
- 2. 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.