While small-cap stocks, such as MicroPort Scientific Corporation (SEHK:853) with its market cap of HK$15.03B, 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 Medical Equipment industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 853 here.

Does 853 generate an acceptable amount of cash through operations?

Over the past year, 853 has reduced its debt from US$296.31M to US$251.48M , which comprises of short- and long-term debt. With this debt payback, 853’s cash and short-term investments stands at US$171.94M for investing into the business. Moreover, 853 has produced cash from operations of US$97.19M in the last twelve months, resulting in an operating cash to total debt ratio of 38.65%, meaning that 853’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 853’s case, it is able to generate 0.39x cash from its debt capital.

Can 853 meet its short-term obligations with the cash in hand?

At the current liabilities level of US$198.89M liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$429.71M, leading to a 2.16x current account ratio. Generally, for Medical Equipment companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Can 853 service its debt comfortably?

With a debt-to-equity ratio of 57.23%, 853 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 853’s case, the ratio of 4.74x suggests that interest is appropriately 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.

Next Steps:

Although 853’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 853’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 853’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research MicroPort Scientific to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 853’s future growth? Take a look at our free research report of analyst consensus for 853’s outlook.

2. Valuation: What is 853 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 853 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 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.