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Investors are always looking for growth in small-cap stocks like Xinyi Glass Holdings Limited (HKG:868), with a market cap of HK$38b. However, an important fact which most ignore is: how financially healthy is the business? 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. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into 868 here.
Does 868 Produce Much Cash Relative To Its Debt?
Over the past year, 868 has ramped up its debt from HK$8.5b to HK$10.0b , which includes long-term debt. With this growth in debt, 868 currently has HK$4.7b remaining in cash and short-term investments to keep the business going. Additionally, 868 has produced HK$4.6b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 47%, signalling that 868’s operating cash is sufficient to cover its debt.
Does 868’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$6.6b, the company has been able to meet these commitments with a current assets level of HK$9.2b, leading to a 1.39x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Auto Components companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Is 868’s debt level acceptable?
With a debt-to-equity ratio of 53%, 868 can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether 868 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 868's, case, the ratio of 27.4x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as 868’s high interest coverage is seen as responsible and safe practice.
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868’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 868's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how 868 has been performing in the past. I recommend you continue to research Xinyi Glass Holdings to get a better picture of the small-cap by looking at: