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While small-cap stocks, such as Hyfusin Group Holdings Limited (HKG:8512) with its market cap of HK$114m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into 8512 here.

8512’s Debt (And Cash Flows)

8512 has sustained its debt level by about HK$34m over the last 12 months – this includes long-term debt. At this constant level of debt, 8512's cash and short-term investments stands at HK$58m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of 8512’s operating efficiency ratios such as ROA here.

Does 8512’s liquid assets cover its short-term commitments?

With current liabilities at HK$50m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.44x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Household Products companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Is 8512’s debt level acceptable?

8512’s level of debt is appropriate relative to its total equity, at 31%. This range is considered safe as 8512 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 8512 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 8512's, case, the ratio of 5.3x 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:

8512’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 8512's financial health. Other important fundamentals need to be considered alongside. You should continue to research Hyfusin Group Holdings to get a better picture of the stock by looking at:

1. Historical Performance: What has 8512'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.

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.