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While small-cap stocks, such as Regal International Airport Group Company Limited (HKG:357) with its market cap of HK$2.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into 357 here.

357’s Debt (And Cash Flows)

357 has shrunk its total debt levels in the last twelve months, from CN¥2.6b to CN¥2.3b , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at CN¥82m to keep the business going. Additionally, 357 has produced CN¥1.2b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 53%, signalling that 357’s current level of operating cash is high enough to cover debt.

Does 357’s liquid assets cover its short-term commitments?

With current liabilities at CN¥3.7b, it seems that the business may not have an easy time meeting these commitments with a current assets level of CN¥487m, leading to a current ratio of 0.13x. The current ratio is calculated by dividing current assets by current liabilities.

Can 357 service its debt comfortably?

With debt reaching 50% of equity, 357 may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether 357 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 357's, case, the ratio of 7.47x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 357 ample headroom to grow its debt facilities.

Next Steps:

357’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure 357 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Regal International Airport Group to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 357’s future growth? Take a look at our free research report of analyst consensus for 357’s outlook.

2. Valuation: What is 357 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 357 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.