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While small-cap stocks, such as Asiaray Media Group Limited (HKG:1993) with its market cap of HK$1.6b, 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into 1993 here.

1993’s Debt (And Cash Flows)

Over the past year, 1993 has ramped up its debt from HK$144m to HK$269m , which accounts for long term debt. With this rise in debt, 1993 currently has HK$386m remaining in cash and short-term investments , ready to be used for running the business. On top of this, 1993 has produced cash from operations of HK$138m during the same period of time, resulting in an operating cash to total debt ratio of 51%, signalling that 1993’s current level of operating cash is high enough to cover debt.

Can 1993 meet its short-term obligations with the cash in hand?

Looking at 1993’s HK$944m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Media companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Does 1993 face the risk of succumbing to its debt-load?

With debt reaching 47% of equity, 1993 may be thought of as relatively highly levered. 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 1993’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 1993, the ratio of 56.56x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as 1993’s high interest coverage is seen as responsible and safe practice.

Next Steps:

1993’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. Since there is also no concerns around 1993's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure 1993 has company-specific issues impacting its capital structure decisions. You should continue to research Asiaray Media Group to get a more holistic view of the small-cap by looking at: