Investors are always looking for growth in small-cap stocks like Cabbeen Fashion Limited (HKG:2030), with a market cap of HK$1.4b. However, an important fact which most ignore is: how financially healthy is the business? 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. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 2030 here.

Does 2030 produce enough cash relative to debt?

2030 has shrunken its total debt levels in the last twelve months, from CN¥329m to CN¥292m , which comprises of short- and long-term debt. With this reduction in debt, 2030’s cash and short-term investments stands at CN¥873m , ready to deploy into the business. Moreover, 2030 has produced cash from operations of CN¥359m during the same period of time, resulting in an operating cash to total debt ratio of 123%, meaning that 2030’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 2030’s case, it is able to generate 1.23x cash from its debt capital.

Does 2030’s liquid assets cover its short-term commitments?

Looking at 2030’s most recent CN¥510m liabilities, the company has been able to meet these obligations given the level of current assets of CN¥1.7b, with a current ratio of 3.35x. However, anything above 3x may be considered excessive by some investors. They might argue 2030 is leaving too much capital in low-earning investments.

Is 2030’s debt level acceptable?

With a debt-to-equity ratio of 26%, 2030’s debt level may be seen as prudent. This range is considered safe as 2030 is not taking on too much debt obligation, which may be constraining for future growth.

Next Steps:

2030’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 2030’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Cabbeen Fashion to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 2030’s future growth? Take a look at our free research report of analyst consensus for 2030’s outlook.

2. Valuation: What is 2030 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 2030 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.