West China Cement Limited (HKG:2233): Time For A Financial Health Check
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While small-cap stocks, such as West China Cement Limited (HKG:2233) with its market cap of HK$6.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to 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, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 2233 here.
Does 2233 produce enough cash relative to debt?
2233’s debt levels have fallen from CN¥3.9b to CN¥3.5b over the last 12 months , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at CN¥1.4b , ready to deploy into the business. Additionally, 2233 has produced cash from operations of CN¥2.3b during the same period of time, resulting in an operating cash to total debt ratio of 65%, signalling that 2233’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 2233’s case, it is able to generate 0.65x cash from its debt capital.
Can 2233 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥2.3b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.37x. Usually, for Basic Materials companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 2233 face the risk of succumbing to its debt-load?
2233 is a relatively highly levered company with a debt-to-equity of 49%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether 2233 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 2233’s, case, the ratio of 9.62x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 2233 ample headroom to grow its debt facilities.
Next Steps:
Although 2233’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 2233’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 2233 has been performing in the past. I suggest you continue to research West China Cement to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 2233’s future growth? Take a look at our free research report of analyst consensus for 2233’s outlook.
Valuation: What is 2233 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 2233 is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
