While small-cap stocks, such as AustChina Holdings Limited (ASX:AUH) with its market cap of A$5.58M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the oil and gas industry, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into AUH here.
How does AUH’s operating cash flow stack up against its debt?
AUH has shrunken its total debt levels in the last twelve months, from A$3.6M to A$2.2M , which is made up of current and long term debt. With this reduction in debt, AUH’s cash and short-term investments stands at A$0.2M for investing into the business. However, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of AUH’s operating efficiency ratios such as ROA here.
Does AUH’s liquid assets cover its short-term commitments?
Looking at AUH’s most recent A$1.1M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of A$0.3M, leading to a 0.23x current account ratio. which is under the appropriate industry ratio of 3x.
Does AUH face the risk of succumbing to its debt-load?
With debt at 16.93% of equity, AUH may be thought of as appropriately levered. AUH is not taking on too much debt commitment, which may be constraining for future growth. AUH’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? AUH’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may be different. I suggest keeping on top of market expectations for AUH’s future growth on our free analysis platform.
Are you a potential investor? AUH appears to have maintained a sensible level of debt, which means there’s still some headroom to grow debt funding. But its current cash flow coverage of existing debt, in addition to the low liquidity, is concerning. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of AUH’s track record. As a following step, you should take a look at AUH’s past performance analysis on our free platform to conclude on AUH’s financial health.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.