While small-cap stocks, such as C&D International Investment Group Limited (SEHK:1908) with its market cap of HK$5.73B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, since poor capital management may bring about 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. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 1908 here.

How does 1908’s operating cash flow stack up against its debt?

Over the past year, 1908 has ramped up its debt from CN¥119.26M to CN¥1.06B – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CN¥251.98M , ready to deploy into the business. On top of this, 1908 has generated CN¥3.67M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 0.35%, signalling that 1908’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1908’s case, it is able to generate 0.0035x cash from its debt capital.

Can 1908 meet its short-term obligations with the cash in hand?

Looking at 1908’s most recent CN¥417.43M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥1.09B, with a current ratio of 2.6x. Usually, for Real Estate 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.

Can 1908 service its debt comfortably?

With total debt exceeding equities, 1908 is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.

Next Steps:

1908’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. 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 1908 has been performing in the past. I suggest you continue to research C&D International Investment Group to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.