Investors are always looking for growth in small-cap stocks like Best Food Holding Company Limited (HKG:1488), with a market cap of HK$1.8b. However, an important fact which most ignore is: how financially healthy is the business? Since 1488 is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 1488 here.

How much cash does 1488 generate through its operations?

1488’s debt levels have fallen from CN¥449m to CN¥214m over the last 12 months made up of predominantly near term debt. With this reduction in debt, the current cash and short-term investment levels stands at CN¥323m 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 1488’s operating efficiency ratios such as ROA here.

Can 1488 pay its short-term liabilities?

At the current liabilities level of CN¥337m, the company has been able to meet these commitments with a current assets level of CN¥577m, leading to a 1.71x current account ratio. Generally, for Luxury companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does 1488 face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 24%, 1488’s debt level may be seen as prudent. 1488 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Risk around debt is very low for 1488, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

1488 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how 1488 has been performing in the past. I suggest you continue to research Best Food Holding to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 1488’s future growth? Take a look at our free research report of analyst consensus for 1488’s outlook.

2. Historical Performance: What has 1488’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 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.