Investors are always looking for growth in small-cap stocks like China Aircraft Leasing Group Holdings Limited (SEHK:1848), with a market cap of HK$5.66B. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes 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. However, this commentary is still very high-level, so I recommend you dig deeper yourself into 1848 here.

How does 1848’s operating cash flow stack up against its debt?

1848 has built up its total debt levels in the last twelve months, from HK$20,798.6M to HK$25,840.5M , which comprises of short- and long-term debt. With this growth in debt, 1848’s cash and short-term investments stands at HK$5,971.9M for investing into the business. Moreover, 1848 has generated cash from operations of HK$4,092.3M during the same period of time, leading to an operating cash to total debt ratio of 15.84%, signalling that 1848’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1848’s case, it is able to generate 0.16x cash from its debt capital.

Can 1848 meet its short-term obligations with the cash in hand?

Looking at 1848’s most recent HK$5,959.5M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$24,683.7M, with a current ratio of 4.14x. However, a ratio greater than 3x may be considered as too high, as 1848 could be holding too much capital in a low-return investment environment.

Is 1848’s debt level acceptable?

With total debt exceeding equities, 1848 is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.

Next Steps:

1848’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. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. This is only a rough assessment of financial health, and I’m sure 1848 has company-specific issues impacting its capital structure decisions. You should continue to research China Aircraft Leasing Group Holdings to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 1848’s future growth? Take a look at our free research report of analyst consensus for 1848’s outlook.