China Harmony New Energy Auto Holding Limited (HKG:3836) is a small-cap stock with a market capitalization of CN¥4.63b. 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? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. 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 3836 here.

How much cash does 3836 generate through its operations?

3836 has sustained its debt level by about CN¥1.83b over the last 12 months comprising of short- and long-term debt. At this current level of debt, 3836’s cash and short-term investments stands at CN¥1.74b , ready to deploy into the business. On top of this, 3836 has produced cash from operations of CN¥107.35m over the same time period, leading to an operating cash to total debt ratio of 5.85%, signalling that 3836’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 3836’s case, it is able to generate 0.059x cash from its debt capital.

Does 3836’s liquid assets cover its short-term commitments?

Looking at 3836’s most recent CN¥3.68b liabilities, the company has been able to meet these commitments with a current assets level of CN¥5.76b, leading to a 1.56x current account ratio. For Specialty Retail companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is 3836’s debt level acceptable?

3836’s level of debt is appropriate relative to its total equity, at 28.97%. This range is considered safe as 3836 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 3836’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 3836, the ratio of 14.62x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.