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While small-cap stocks, such as AustChina Holdings Limited (ASX:AUH) with its market cap of AU$6m, 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 Oil and Gas industry, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into AUH here.

Does AUH produce enough cash relative to debt?

Over the past year, AUH has ramped up its debt from AU$2m to AU$3m . With this rise in debt, the current cash and short-term investment levels stands at AU$116k for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of AUH’s operating efficiency ratios such as ROA here.

Can AUH meet its short-term obligations with the cash in hand?

With current liabilities at AU$3m, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.12x.

Is AUH’s debt level acceptable?

AUH’s level of debt is appropriate relative to its total equity, at 25%. AUH is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with AUH, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

AUH’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for AUH’s financial health. Other important fundamentals need to be considered alongside. You should continue to research AustChina Holdings to get a better picture of the stock by looking at:

1. Historical Performance: What has AUH’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.

2. 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.