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China VAST Industrial Urban Development Company Limited (HKG:6166) is a small-cap stock with a market capitalization of HK$5.3b. 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? Assessing first and foremost the financial health is 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. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into 6166 here.
6166’s Debt (And Cash Flows)
Over the past year, 6166 has ramped up its debt from CN¥6.0b to CN¥6.5b , which accounts for long term debt. With this increase in debt, 6166's cash and short-term investments stands at CN¥1.8b , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can examine some of 6166’s operating efficiency ratios such as ROA here.
Can 6166 pay its short-term liabilities?
Looking at 6166’s CN¥4.3b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥11b, leading to a 2.55x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. 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.
Is 6166’s debt level acceptable?
6166 is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if 6166’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 6166, the ratio of 25.11x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 6166 ample headroom to grow its debt facilities.
Next Steps:
6166’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 6166's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China VAST Industrial Urban Development to get a better picture of the small-cap by looking at: