While small-cap stocks, such as Yangtze Optical Fibre And Cable Joint Stock Limited Company (HKG:6869) with its market cap of HK$8.72b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Communications companies, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. 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 6869 here.

How does 6869’s operating cash flow stack up against its debt?

Over the past year, 6869 has reduced its debt from CN¥1.71b to CN¥1.47b , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at CN¥1.22b , ready to deploy into the business. Moreover, 6869 has generated cash from operations of CN¥1.19b during the same period of time, leading to an operating cash to total debt ratio of 80.8%, signalling that 6869’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 6869’s case, it is able to generate 0.81x cash from its debt capital.

Does 6869’s liquid assets cover its short-term commitments?

At the current liabilities level of CN¥2.94b liabilities, the company has been able to meet these commitments with a current assets level of CN¥6.00b, leading to a 2.04x current account ratio. For Communications companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can 6869 service its debt comfortably?

With debt at 23.8% of equity, 6869 may be thought of as appropriately levered. This range is considered safe as 6869 is not taking on too much debt obligation, which may be constraining for future growth.

Next Steps:

6869 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 6869 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Yangtze Optical Fibre And Cable Limited to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 6869’s future growth? Take a look at our free research report of analyst consensus for 6869’s outlook.

2. Valuation: What is 6869 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 6869 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.