ZH International Holdings Limited (SEHK:185) is a small-cap stock with a market capitalization of HK$1.88B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that 185 is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into 185 here.

How does 185’s operating cash flow stack up against its debt?

185 has built up its total debt levels in the last twelve months, from HK$798.6M to HK$1,366.6M , which comprises of short- and long-term debt. With this rise in debt, 185 currently has HK$417.8M remaining in cash and short-term investments for investing into the business. However, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 185’s operating efficiency ratios such as ROA here.

Does 185’s liquid assets cover its short-term commitments?

With current liabilities at HK$2,371.9M liabilities, the company has been able to meet these obligations given the level of current assets of HK$3,091.0M, with a current ratio of 1.3x. For real estate companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can 185 service its debt comfortably?

Since total debt levels have outpaced equities, 185 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since 185 is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

Are you a shareholder? At its current level of cash flow coverage, 185 has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that 185’s financial situation may change. I suggest researching market expectations for 185’s future growth on our free analysis platform.