While small-cap stocks, such as Texwinca Holdings Limited (HKG:321) with its market cap of HK$3.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 321 here.

Does 321 produce enough cash relative to debt?

321’s debt levels have fallen from HK$2.4b to HK$1.2b over the last 12 months – this includes long-term debt. With this reduction in debt, 321 currently has HK$1.9b remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 321’s operating efficiency ratios such as ROA here.

Can 321 pay its short-term liabilities?

At the current liabilities level of HK$3.1b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.01x. Generally, for Luxury companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can 321 service its debt comfortably?

With a debt-to-equity ratio of 22%, 321’s debt level may be seen as prudent. This range is considered safe as 321 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.

Next Steps:

321’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 321 has been performing in the past. You should continue to research Texwinca Holdings to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 321’s future growth? Take a look at our free research report of analyst consensus for 321’s outlook.

2. Valuation: What is 321 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 321 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.