Investors are always looking for growth in small-cap stocks like HKR International Limited (HKG:480), with a market cap of HK$5.64b. 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 a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 480 here.

How does 480’s operating cash flow stack up against its debt?

480’s debt level has been constant at around HK$8.75b over the previous year made up of current and long term debt. At this stable level of debt, 480 currently has HK$3.27b remaining in cash and short-term investments , ready to deploy into the business. Additionally, 480 has generated HK$374.1m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 4.3%, indicating that 480’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 480’s case, it is able to generate 0.043x cash from its debt capital.

Does 480’s liquid assets cover its short-term commitments?

Looking at 480’s most recent HK$4.46b liabilities, the company has been able to meet these commitments with a current assets level of HK$11.60b, leading to a 2.6x current account ratio. Generally, for Real Estate companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can 480 service its debt comfortably?

480’s level of debt is appropriate relative to its total equity, at 39.5%. 480 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if 480’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 480, the ratio of 1.18x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

480’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 proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 480’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research HKR International to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 480’s future growth? Take a look at our free research report of analyst consensus for 480’s outlook.

2. Valuation: What is 480 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 480 is currently mispriced by the market.

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 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.