Vantage International (Holdings) Limited (HKG:15) is a small-cap stock with a market capitalization of HK$1.3b. 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? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into 15 here.

How does 15’s operating cash flow stack up against its debt?

15’s debt levels have fallen from HK$1.6b to HK$1.4b over the last 12 months made up of predominantly near term debt. With this reduction in debt, the current cash and short-term investment levels stands at HK$1.3b , ready to deploy into the business. On top of this, 15 has produced cash from operations of HK$966m over the same time period, leading to an operating cash to total debt ratio of 71%, meaning that 15’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 15’s case, it is able to generate 0.71x cash from its debt capital.

Can 15 pay its short-term liabilities?

Looking at 15’s HK$2.3b in current liabilities, the company has been able to meet these obligations given the level of current assets of HK$3.0b, with a current ratio of 1.29x. Usually, for Construction companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is 15’s debt level acceptable?

With debt at 34% of equity, 15 may be thought of as appropriately levered. This range is considered safe as 15 is not taking on too much debt obligation, which may be constraining for future growth. We can test if 15’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 15, the ratio of 20.97x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 15 ample headroom to grow its debt facilities.

Next Steps:

15’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 15 has company-specific issues impacting its capital structure decisions. You should continue to research Vantage International (Holdings) to get a better picture of the stock by looking at: