Investors are always looking for growth in small-cap stocks like Hwa Hong Corporation Limited (SGX:H19), with a market cap of S$215.48M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, 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. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into H19 here.

Does H19 generate an acceptable amount of cash through operations?

Over the past year, H19 has reduced its debt from S$68.92M to S$53.18M , which comprises of short- and long-term debt. With this debt repayment, H19’s cash and short-term investments stands at S$50.68M , ready to deploy into the business. Additionally, H19 has produced S$7.86M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 14.78%, signalling that H19’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 H19’s case, it is able to generate 0.15x cash from its debt capital.

Can H19 pay its short-term liabilities?

With current liabilities at S$60.57M, the company has been able to meet these commitments with a current assets level of S$61.10M, leading to a 1.01x current account ratio. Generally, for Real Estate companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Can H19 service its debt comfortably?

With debt at 26.97% of equity, H19 may be thought of as appropriately levered. This range is considered safe as H19 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether H19 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 H19’s, case, the ratio of 2.61x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

H19’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, 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 H19 has been performing in the past. You should continue to research Hwa Hong to get a more holistic view of the stock by looking at: