While small-cap stocks, such as Kasen International Holdings Limited (SEHK:496) with its market cap of HK$4.00B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Consumer Durables industry facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 496 here.

Does 496 generate enough cash through operations?

496’s debt levels have fallen from CN¥780.95M to CN¥492.97M over the last 12 months – this includes both the current and long-term debt. With this debt payback, 496’s cash and short-term investments stands at CN¥546.74M , ready to deploy into the business. Additionally, 496 has generated cash from operations of CN¥596.34M over the same time period, leading to an operating cash to total debt ratio of 120.97%, meaning that 496’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 496’s case, it is able to generate 1.21x cash from its debt capital.

Does 496’s liquid assets cover its short-term commitments?

At the current liabilities level of CN¥5.71B liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥7.62B, with a current ratio of 1.34x. Usually, for Consumer Durables companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Does 496 face the risk of succumbing to its debt-load?

With debt at 17.01% of equity, 496 may be thought of as appropriately levered. 496 is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with 496, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

496’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 496 has company-specific issues impacting its capital structure decisions. You should continue to research Kasen International Holdings to get a more holistic view of the stock by looking at: