While small-cap stocks, such as Sinomax Group Limited (SEHK:1418) with its market cap of HK$1.02B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 1418 here.

Does 1418 generate enough cash through operations?

Over the past year, 1418 has ramped up its debt from HK$476.90M to HK$736.05M , which comprises of short- and long-term debt. With this increase in debt, 1418 currently has HK$188.34M remaining in cash and short-term investments 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. For this article’s sake, I won’t be looking at this today, but you can assess some of 1418’s operating efficiency ratios such as ROA here.

Does 1418’s liquid assets cover its short-term commitments?

At the current liabilities level of HK$1.35B liabilities, the company has been able to meet these commitments with a current assets level of HK$1.74B, leading to a 1.29x current account ratio. 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 1418 face the risk of succumbing to its debt-load?

1418 is a relatively highly levered company with a debt-to-equity of 56.21%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 1418 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1418’s, case, the ratio of 1.52x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

1418’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. I admit this is a fairly basic analysis for 1418’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Sinomax Group to get a better picture of the stock by looking at: