While small-cap stocks, such as Kasen International Holdings Limited (SEHK:496) with its market cap of HK$2.35B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Consumer Durables industry facing headwinds from current disruption, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 496 here.

How does 496’s operating cash flow stack up against its debt?

496 has shrunken its total debt levels in the last twelve months, from CN¥2.04B to CN¥780.95M – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at CN¥452.61M , ready to deploy into the business. On top of this, 496 has generated cash from operations of CN¥436.18M during the same period of time, leading to an operating cash to total debt ratio of 55.85%, signalling that 496’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 496’s case, it is able to generate 0.56x cash from its debt capital.

Can 496 meet its short-term obligations with the cash in hand?

With current liabilities at CN¥2.81B, the company has been able to meet these obligations given the level of current assets of CN¥5.34B, with a current ratio of 1.9x. Generally, for Consumer Durables companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Does 496 face the risk of succumbing to its debt-load?

With debt at 21.13% of equity, 496 may be thought of as appropriately levered. This range is considered safe as 496 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. 496’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

496 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 496 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Kasen International Holdings to get a better picture of the stock by looking at: