While small-cap stocks, such as Build King Holdings Limited (HKG:240) with its market cap of HK$1.9b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into 240 here.

240’s Debt (And Cash Flows)

240 has built up its total debt levels in the last twelve months, from HK$385m to HK$405m , which includes long-term debt. With this growth in debt, 240 currently has HK$1.4b remaining in cash and short-term investments to keep the business going. Moreover, 240 has generated HK$653m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 161%, indicating that 240’s operating cash is sufficient to cover its debt.

Does 240’s liquid assets cover its short-term commitments?

With current liabilities at HK$3.2b, the company has been able to meet these obligations given the level of current assets of HK$3.8b, with a current ratio of 1.19x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Construction companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Can 240 service its debt comfortably?

240 is a relatively highly levered company with a debt-to-equity of 43%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 240's case, the ratio of 113x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 240 ample headroom to grow its debt facilities.

Next Steps:

Although 240’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 240 has been performing in the past. You should continue to research Build King Holdings to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 240’s future growth? Take a look at our free research report of analyst consensus for 240’s outlook.

2. Valuation: What is 240 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 240 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.