Luxking Group Holdings Limited (SGX:BKK) is a small-cap stock with a market capitalization of S$3.8m. 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? 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. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into BKK here.

Does BKK produce enough cash relative to debt?

Over the past year, BKK has reduced its debt from CN¥152.4m to CN¥133.9m , which comprises of short- and long-term debt. With this debt repayment, BKK’s cash and short-term investments stands at CN¥18.6m for investing into the business. Moreover, BKK has produced cash from operations of CN¥27.6m in the last twelve months, resulting in an operating cash to total debt ratio of 20.6%, meaning that BKK’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BKK’s case, it is able to generate 0.21x cash from its debt capital.

Can BKK pay its short-term liabilities?

With current liabilities at CN¥157.0m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.73x. Usually, for Commercial Services companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can BKK service its debt comfortably?

With a debt-to-equity ratio of 77.6%, BKK can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether BKK 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 BKK’s, case, the ratio of 1.86x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as BKK’s low interest coverage already puts the company at higher risk of default.

Next Steps:

At its current level of cash flow coverage, BKK has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for BKK’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Luxking Group Holdings to get a more holistic view of the stock by looking at:

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

2. Valuation: What is BKK 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 BKK 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.