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Investors are always looking for growth in small-cap stocks like AVIC International Holding (HK) Limited (HKG:232), with a market cap of HK$1.7b. However, an important fact which most ignore is: how financially healthy is the business? Since 232 is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 232 here.
How much cash does 232 generate through its operations?
Over the past year, 232 has reduced its debt from HK$1.7b to HK$554m , which comprises of short- and long-term debt. With this reduction in debt, 232’s cash and short-term investments stands at HK$328m , ready to deploy into the business. Moreover, 232 has generated cash from operations of HK$211m during the same period of time, resulting in an operating cash to total debt ratio of 38%, indicating that 232’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In 232’s case, it is able to generate 0.38x cash from its debt capital.
Does 232’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$3.3b liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$4.7b, leading to a 1.44x current account ratio. 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 232 service its debt comfortably?
With a debt-to-equity ratio of 15%, 232’s debt level may be seen as prudent. 232 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for 232, and the company also has the ability and headroom to increase debt if needed going forward.
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232’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 232 has company-specific issues impacting its capital structure decisions. You should continue to research AVIC International Holding (HK) to get a more holistic view of the stock by looking at: