Investors are always looking for growth in small-cap stocks like Lanzhou Zhuangyuan Pasture Co., Ltd. (HKG:1533), with a market cap of HK$2.3b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, 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, this is not a comprehensive overview, so I suggest you dig deeper yourself into 1533 here.

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Does 1533 Produce Much Cash Relative To Its Debt?

1533 has built up its total debt levels in the last twelve months, from CN¥440m to CN¥666m – this includes long-term debt. With this growth in debt, 1533's cash and short-term investments stands at CN¥489m to keep the business going. Additionally, 1533 has produced cash from operations of CN¥157m over the same time period, leading to an operating cash to total debt ratio of 24%, signalling that 1533’s debt is appropriately covered by operating cash.

Does 1533’s liquid assets cover its short-term commitments?

With current liabilities at CN¥766m, the company may not have an easy time meeting these commitments with a current assets level of CN¥621m, leading to a current ratio of 0.81x. The current ratio is calculated by dividing current assets by current liabilities.

Is 1533’s debt level acceptable?

With a debt-to-equity ratio of 55%, 1533 can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether 1533 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 1533's, case, the ratio of 3.44x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 1533 ample headroom to grow its debt facilities.

Next Steps:

1533’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how 1533 has been performing in the past. I recommend you continue to research Lanzhou Zhuangyuan Pasture to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 1533’s future growth? Take a look at our free research report of analyst consensus for 1533’s outlook.

2. Historical Performance: What has 1533's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

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.

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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.