While small-cap stocks, such as Midland IC&I Limited (HKG:459) with its market cap of HK$523.5m, 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into 459 here.

How does 459’s operating cash flow stack up against its debt?

459’s debt levels surged from HK$178.8m to HK$312.3m over the last 12 months , which is made up of current and long term debt. With this growth in debt, 459’s cash and short-term investments stands at HK$557.1m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 459’s operating efficiency ratios such as ROA here.

Can 459 meet its short-term obligations with the cash in hand?

At the current liabilities level of HK$370.8m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.49x. Usually, for Real Estate companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is 459’s debt level acceptable?

459’s level of debt is appropriate relative to its total equity, at 28.0%. This range is considered safe as 459 is not taking on too much debt obligation, which may be constraining for future growth. We can test if 459’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 459, the ratio of 30.57x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 459’s high interest coverage is seen as responsible and safe practice.

Next Steps:

459’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 459 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Midland IC&I to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 459’s future growth? Take a look at our free research report of analyst consensus for 459’s outlook.

2. Valuation: What is 459 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 459 is currently mispriced by the market.

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.