Investors are always looking for growth in small-cap stocks like Yashili International Holdings Ltd (SEHK:1230), with a market cap of HK$8.49B. However, an important fact which most ignore is: how financially healthy is the business? Since 1230 is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into 1230 here.

Does 1230 generate an acceptable amount of cash through operations?

1230’s debt levels surged from CN¥664.20M to CN¥1.14B over the last 12 months . With this growth in debt, the current cash and short-term investment levels stands at CN¥2.12B for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of 1230’s operating efficiency ratios such as ROA here.

Can 1230 meet its short-term obligations with the cash in hand?

At the current liabilities level of CN¥2.25B liabilities, the company has been able to meet these commitments with a current assets level of CN¥4.10B, leading to a 1.82x current account ratio. Generally, for Food 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.

Does 1230 face the risk of succumbing to its debt-load?

1230’s level of debt is appropriate relative to its total equity, at 19.85%. 1230 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. 1230’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:

1230’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. Keep in mind I haven’t considered other factors such as how 1230 has been performing in the past. I recommend you continue to research Yashili International Holdings to get a better picture of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for 1230’s future growth? Take a look at our free research report of analyst consensus for 1230’s outlook.

• 2. Valuation: What is 1230 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 1230 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.