On Real International Holdings Limited (SEHK:8245) is a small-cap stock with a market capitalization of HK$165.12M. 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? Communications companies, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into 8245 here.

Does 8245 generate enough cash through operations?

8245’s debt levels surged from HK$24.98M to HK$46.52M over the last 12 months made up of predominantly near term debt. With this increase in debt, 8245 currently has HK$37.95M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 8245’s operating efficiency ratios such as ROA here.

Does 8245’s liquid assets cover its short-term commitments?

Looking at 8245’s most recent HK$131.54M liabilities, the company has been able to meet these commitments with a current assets level of HK$176.11M, leading to a 1.34x current account ratio. Usually, for Communications companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does 8245 face the risk of succumbing to its debt-load?

8245 is a relatively highly levered company with a debt-to-equity of 56.55%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 8245 is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

8245’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. I admit this is a fairly basic analysis for 8245’s financial health. Other important fundamentals need to be considered alongside. You should continue to research On Real International Holdings to get a better picture of the stock by looking at:

1. Valuation: What is 8245 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 8245 is currently mispriced by the market.

2. Historical Performance: What has 8245’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

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 pass 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.