Investors are always looking for growth in small-cap stocks like Forebase International Holdings Limited (SEHK:2310), with a market cap of HK$173.44M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 2310 here.

How does 2310’s operating cash flow stack up against its debt?

Over the past year, 2310 has reduced its debt from HK$102.31M to HK$80.05M , which comprises of short- and long-term debt. With this reduction in debt, 2310’s cash and short-term investments stands at HK$70.85M for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of 2310’s operating efficiency ratios such as ROA here.

Can 2310 pay its short-term liabilities?

With current liabilities at HK$161.24M, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.1x. Usually, for Electronic 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 2310’s debt level acceptable?

With total debt exceeding equities, 2310 is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 2310 is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

At its current level of cash flow coverage, 2310 has room for improvement to better cushion for events which may require debt repayment. However, 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 2310 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Forebase International Holdings to get a more holistic view of the stock by looking at: