While small-cap stocks, such as Hi-P International Limited (SGX:H17) with its market cap of S$1.86B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Electronic companies, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into H17 here.

Does H17 generate an acceptable amount of cash through operations?

H17’s debt levels surged from S$98.49M to S$206.82M over the last 12 months made up of predominantly near term debt. With this growth in debt, H17 currently has S$277.91M remaining in cash and short-term investments for investing into the business. Additionally, H17 has generated S$260.22M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 125.82%, indicating that H17’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In H17’s case, it is able to generate 1.26x cash from its debt capital.

Does H17’s liquid assets cover its short-term commitments?

With current liabilities at S$739.61M, it seems that the business has been able to meet these obligations given the level of current assets of S$920.15M, with a current ratio of 1.24x. For Electronic companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

Is H17’s debt level acceptable?

With a debt-to-equity ratio of 39.06%, H17’s debt level may be seen as prudent. H17 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if H17’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 H17, the ratio of 2916x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as H17’s high interest coverage is seen as responsible and safe practice.

Next Steps:

H17’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for H17’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Hi-P International to get a better picture of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for H17’s future growth? Take a look at our free research report of analyst consensus for H17’s outlook.

• 2. Valuation: What is H17 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 H17 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 pass 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.