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Investors are always looking for growth in small-cap stocks like Huazhong In-Vehicle Holdings Company Limited (HKG:6830), with a market cap of HK$2.7b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into 6830 here.

6830’s Debt (And Cash Flows)

6830 has built up its total debt levels in the last twelve months, from CN¥723m to CN¥798m , which includes long-term debt. With this increase in debt, 6830 currently has CN¥109m remaining in cash and short-term investments , ready to be used for running the business. Moreover, 6830 has generated CN¥204m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 26%, indicating that 6830’s current level of operating cash is high enough to cover debt.

Does 6830’s liquid assets cover its short-term commitments?

Looking at 6830’s CN¥1.8b in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of CN¥1.8b, leading to a current ratio of 0.96x. The current ratio is calculated by dividing current assets by current liabilities.

Is 6830’s debt level acceptable?

With debt reaching 81% of equity, 6830 may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether 6830 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 6830's, case, the ratio of 4.65x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although 6830’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure 6830 has company-specific issues impacting its capital structure decisions. You should continue to research Huazhong In-Vehicle Holdings to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 6830’s future growth? Take a look at our free research report of analyst consensus for 6830’s outlook.

2. Historical Performance: What has 6830'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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.