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While small-cap stocks, such as AMVIG Holdings Limited (HKG:2300) with its market cap of HK$1.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 2300 here.

2300’s Debt (And Cash Flows)

2300 has built up its total debt levels in the last twelve months, from HK$1.5b to HK$1.8b – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$1.3b , ready to be used for running the business. Moreover, 2300 has produced cash from operations of HK$879m in the last twelve months, leading to an operating cash to total debt ratio of 50%, indicating that 2300’s operating cash is sufficient to cover its debt.

Can 2300 pay its short-term liabilities?

With current liabilities at HK$988m, it appears that the company has been able to meet these commitments with a current assets level of HK$2.5b, leading to a 2.48x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Packaging 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.

Is 2300’s debt level acceptable?

2300 is a relatively highly levered company with a debt-to-equity of 44%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 2300's case, the ratio of 7.1x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

2300’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. I admit this is a fairly basic analysis for 2300's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research AMVIG Holdings to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 2300’s future growth? Take a look at our free research report of analyst consensus for 2300’s outlook.

2. Valuation: What is 2300 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 2300 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.