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While small-cap stocks, such as L'Occitane International S.A. (HKG:973) with its market cap of HK$23b, 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 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 just a partial view of the stock, and I recommend you dig deeper yourself into 973 here.

Does 973 Produce Much Cash Relative To Its Debt?

973's debt levels surged from €88m to €578m over the last 12 months , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at €144m to keep the business going. Moreover, 973 has produced €169m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 29%, indicating that 973’s current level of operating cash is high enough to cover debt.

Can 973 pay its short-term liabilities?

Looking at 973’s €258m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.15x. The current ratio is the number you get when you divide current assets by current liabilities. For Personal Products companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is 973’s debt level acceptable?

With a debt-to-equity ratio of 53%, 973 can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether 973 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 973's, case, the ratio of 42.14x suggests that interest is comfortably 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:

Although 973’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. I admit this is a fairly basic analysis for 973's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research L'Occitane International to get a more holistic view of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 973’s future growth? Take a look at our free research report of analyst consensus for 973’s outlook.

2. Valuation: What is 973 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 973 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.