While small-cap stocks, such as Thiz Technology Group Limited (SEHK:8119) with its market cap of HK$200.76M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the software industry, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 8119 here.

How does 8119’s operating cash flow stack up against its debt?

8119 has built up its total debt levels in the last twelve months, from HK$30.6M to HK$39.0M , which is made up of current and long term debt. With this growth in debt, 8119’s cash and short-term investments stands at HK$17.5M , ready to deploy into the business. However, 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 8119’s operating efficiency ratios such as ROA here.

Can 8119 meet its short-term obligations with the cash in hand?

At the current liabilities level of HK$2.7M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$17.9M, with a current ratio of 6.54x. Though, anything about 3x may be excessive, since 8119 may be leaving too much capital in low-earning investments.

Is 8119’s level of debt at an acceptable level?

Since total debt levels have outpaced equities, 8119 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since 8119 is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

Are you a shareholder? 8119’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that 8119’s financial situation may change. You should always be keeping on top of market expectations for 8119’s future growth on our free analysis platform.

Are you a potential investor? 8119’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I encourage you to continue your research by taking a look at 8119’s past performance analysis on our free platform to figure out 8119’s financial health position.

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.