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While small-cap stocks, such as Sino-Ocean Group Holding Limited (HKG:3377) with its market cap of HK$27b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into 3377 here.

3377’s Debt (And Cash Flows)

3377 has built up its total debt levels in the last twelve months, from CN¥61b to CN¥89b – this includes long-term debt. With this rise in debt, 3377 currently has CN¥39b remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 3377’s operating efficiency ratios such as ROA here.

Can 3377 meet its short-term obligations with the cash in hand?

With current liabilities at CN¥110b, it appears that the company has been able to meet these commitments with a current assets level of CN¥181b, leading to a 1.64x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Real Estate companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

Can 3377 service its debt comfortably?

3377 is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses.

Next Steps:

3377’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how 3377 has been performing in the past. I suggest you continue to research Sino-Ocean Group Holding to get a more holistic view of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 3377’s future growth? Take a look at our free research report of analyst consensus for 3377’s outlook.

2. Valuation: What is 3377 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 3377 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.