Investors are always looking for growth in small-cap stocks like Allied Sustainability and Environmental Consultants Group Limited (SEHK:8320), with a market cap of HK$214.80M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 8320 here.

Does 8320 generate enough cash through operations?

In the most recent balance sheet, 8320 has borrowed debt capital of around HK$1.61M made up of predominantly near term debt. With this growth in debt, the current cash and short-term investment levels stands at HK$41.31M , ready to deploy into the business. Moving onto cash from operations, 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. For this article’s sake, I won’t be looking at this today, but you can examine some of 8320’s operating efficiency ratios such as ROA here.

Can 8320 meet its short-term obligations with the cash in hand?

With current liabilities at HK$3.07M, it seems that the business has been able to meet these commitments with a current assets level of HK$81.90M, leading to a 26.64x current account ratio. Though, anything above 3x is considered high and could mean that 8320 has too much idle capital in low-earning investments.

Is 8320’s debt level acceptable?

8320’s level of debt is low relative to its total equity, at 1.93%. 8320 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 8320 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 8320’s, case, the ratio of 1102x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 8320’s high interest coverage is seen as responsible and safe practice.

Next Steps:

8320’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 8320 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Allied Sustainability and Environmental Consultants Group to get a more holistic view of the stock by looking at:

• 1. Historical Performance: What has 8320’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

• 2. 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 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.