Chow Sang Sang Holdings International Limited (HKG:116) is a small-cap stock with a market capitalization of HK$10.42b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into 116 here.

Does 116 produce enough cash relative to debt?

116 has sustained its debt level by about HK$2.06b over the last 12 months made up of current and long term debt. At this stable level of debt, the current cash and short-term investment levels stands at HK$1.66b for investing into the business. Additionally, 116 has produced cash from operations of HK$1.13b during the same period of time, resulting in an operating cash to total debt ratio of 54.9%, meaning that 116’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 116’s case, it is able to generate 0.55x cash from its debt capital.

Can 116 meet its short-term obligations with the cash in hand?

With current liabilities at HK$2.84b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.12x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue 116 could be holding too much capital in a low-return investment environment.

Does 116 face the risk of succumbing to its debt-load?

116’s level of debt is appropriate relative to its total equity, at 19.8%. This range is considered safe as 116 is not taking on too much debt obligation, which may be constraining for future growth.

Next Steps:

116 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 116’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Chow Sang Sang Holdings International to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 116’s future growth? Take a look at our free research report of analyst consensus for 116’s outlook.

2. Valuation: What is 116 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 116 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.