Investors are always looking for growth in small-cap stocks like China Magnesium Corporation Limited (ASX:CMC), with a market cap of AU$7.83M. However, an important fact which most ignore is: how financially healthy is the business? Given that CMC is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into CMC here.
How does CMC’s operating cash flow stack up against its debt?
CMC has shrunken its total debt levels in the last twelve months, from AU$5.71M to AU$4.35M , which is made up of current and long term debt. With this debt payback, CMC currently has AU$1.43M remaining in cash and short-term investments 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 CMC’s operating efficiency ratios such as ROA here.
Can CMC pay its short-term liabilities?
With current liabilities at AU$2.20M, the company has been able to meet these obligations given the level of current assets of AU$2.67M, with a current ratio of 1.21x. For Metals and Mining companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CMC face the risk of succumbing to its debt-load?
With debt at 35.15% of equity, CMC may be thought of as appropriately levered. This range is considered safe as CMC is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with CMC, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
CMC’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 will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for CMC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research China Magnesium to get a better picture of the stock by looking at: