While small-cap stocks, such as FIT Hon Teng Limited (HKG:6088) 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, 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. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into 6088 here.

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

6088’s Debt (And Cash Flows)

6088 has built up its total debt levels in the last twelve months, from US$296m to US$989m made up of predominantly near term debt. With this increase in debt, the current cash and short-term investment levels stands at US$1.2b to keep the business going. Moreover, 6088 has produced cash from operations of US$697m in the last twelve months, leading to an operating cash to total debt ratio of 70%, meaning that 6088’s operating cash is sufficient to cover its debt.

Can 6088 pay its short-term liabilities?

Looking at 6088’s US$2.3b 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 1.21x. The current ratio is the number you get when you divide current assets by current liabilities. For Electronic companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

Does 6088 face the risk of succumbing to its debt-load?

With debt reaching 51% of equity, 6088 may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses.

Next Steps:

6088’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. This is only a rough assessment of financial health, and I'm sure 6088 has company-specific issues impacting its capital structure decisions. I recommend you continue to research FIT Hon Teng to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 6088’s future growth? Take a look at our free research report of analyst consensus for 6088’s outlook.

2. Valuation: What is 6088 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 6088 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.