Investors are always looking for growth in small-cap stocks like Sinarmas Land Limited (SGX:A26), with a market cap of S$1.1b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to 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. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into A26 here.

A26’s Debt (And Cash Flows)

A26's debt levels surged from S$1.8b to S$2.0b over the last 12 months – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at S$1.2b , ready to be used for running the business. Moreover, A26 has generated S$375m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 19%, signalling that A26’s debt is not covered by operating cash.

Can A26 pay its short-term liabilities?

At the current liabilities level of S$818m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.47x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

Can A26 service its debt comfortably?

With debt reaching 49% of equity, A26 may be thought of as relatively highly levered. 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 A26 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 A26's, case, the ratio of 3.54x 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:

A26’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. Since there is also no concerns around A26's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for A26's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Sinarmas Land to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for A26’s future growth? Take a look at our free research report of analyst consensus for A26’s outlook.

2. Valuation: What is A26 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 A26 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.