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While small-cap stocks, such as Aowei Holding Limited (HKG:1370) with its market cap of HK$3.0b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 1370 is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into 1370 here.
How much cash does 1370 generate through its operations?
Over the past year, 1370 has reduced its debt from CN¥350m to CN¥290m made up of predominantly near term debt. With this debt payback, 1370 currently has CN¥115m remaining in cash and short-term investments for investing into the business. Moreover, 1370 has generated CN¥29m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 10.0%, meaning that 1370’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In 1370’s case, it is able to generate 0.1x cash from its debt capital.
Does 1370’s liquid assets cover its short-term commitments?
With current liabilities at CN¥509m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.35x. For Metals and Mining 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.
Is 1370’s debt level acceptable?
With debt at 20% of equity, 1370 may be thought of as appropriately levered. 1370 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. 1370’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
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1370’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how 1370 has been performing in the past. I recommend you continue to research Aowei Holding to get a more holistic view of the stock by looking at: