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While small-cap stocks, such as HLH Group Limited (SGX:H27) with its market cap of S$39.95M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to 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, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into H27 here.

How does H27’s operating cash flow stack up against its debt?

H27 has built up its total debt levels in the last twelve months, from S$6.31M to S$7.15M – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at S$1.83M for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 assess some of H27’s operating efficiency ratios such as ROA here.

Can H27 pay its short-term liabilities?

At the current liabilities level of S$16.55M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.97x. Usually, for Food 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.

Does H27 face the risk of succumbing to its debt-load?

H27’s level of debt is low relative to its total equity, at 5.44%. H27 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders.

Next Steps:

H27’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how H27 has been performing in the past. I suggest you continue to research HLH Group to get a better picture of the stock by looking at:

• 1. Valuation: What is H27 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 H27 is currently mispriced by the market.

• 2. Historical Performance: What has H27’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.

• 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.