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China Aluminum Cans Holdings Limited (HKG:6898) is a small-cap stock with a market capitalization of HK$990.23m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is 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. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into 6898 here.
Does 6898 produce enough cash relative to debt?
6898’s debt levels surged from HK$253.00k to HK$90.00m over the last 12 months – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at HK$184.84m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of 6898’s operating efficiency ratios such as ROA here.
Can 6898 meet its short-term obligations with the cash in hand?
Looking at 6898’s most recent HK$166.99m liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$433.35m, leading to a 2.6x current account ratio. For Packaging 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 6898 face the risk of succumbing to its debt-load?
6898’s level of debt is appropriate relative to its total equity, at 15.33%. This range is considered safe as 6898 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 6898 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 6898’s, case, the ratio of 173x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 6898 ample headroom to grow its debt facilities.
Next Steps:
Although 6898’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 6898 has company-specific issues impacting its capital structure decisions. You should continue to research China Aluminum Cans Holdings to get a better picture of the stock by looking at: