While small-cap stocks, such as Keck Seng Investments (Hong Kong) Limited (SEHK:184) with its market cap of HK$2.33B, 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 essential, 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. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into 184 here.

Does 184 generate enough cash through operations?

Over the past year, 184 has reduced its debt from HK$1,942.6M to HK$1,844.1M , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at HK$1,952.2M for investing into the business. Additionally, 184 has generated HK$443.3M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 24.04%, meaning that 184’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 184’s case, it is able to generate 0.24x cash from its debt capital.

Does 184’s liquid assets cover its short-term commitments?

With current liabilities at HK$2,094.2M, it appears that the company has been able to meet these commitments with a current assets level of HK$2,360.4M, leading to a 1.13x current account ratio. For Hospitality companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

Does 184 face the risk of succumbing to its debt-load?

With debt reaching 42.64% of equity, 184 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 184 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 184’s, case, the ratio of 16.73x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 184 ample headroom to grow its debt facilities.

Next Steps:

At its current level of cash flow coverage, 184 has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 184 has been performing in the past. I suggest you continue to research Keck Seng Investments (Hong Kong) to get a more holistic view of the stock by looking at:

1. Valuation: What is 184 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 184 is currently mispriced by the market.

2. Historical Performance: What has 184’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.

3. 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.