While small-cap stocks, such as Frontier Services Group Limited (SEHK:500) with its market cap of HK$2.37B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 500 is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into 500 here.

How does 500’s operating cash flow stack up against its debt?

500’s debt levels have fallen from HK$543.5M to HK$316.8M over the last 12 months , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at HK$101.6M , ready to deploy 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 500’s operating efficiency ratios such as ROA here.

Can 500 pay its short-term liabilities?

Looking at 500’s most recent HK$317.0M liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$426.0M, leading to a 1.34x current account ratio. Generally, for Logistics companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is 500’s debt level acceptable?

500 is a relatively highly levered company with a debt-to-equity of 60.77%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 500 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:

500’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 500’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Frontier Services Group to get a better picture of the stock by looking at:

• 1. Historical Performance: What has 500’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

• 2. 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.