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Bestway Global Holding Inc. (HKG:3358) is a small-cap stock with a market capitalization of HK$3.9b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes essential, 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. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into 3358 here.

Does 3358 Produce Much Cash Relative To Its Debt?

3358 has built up its total debt levels in the last twelve months, from US$158m to US$238m – this includes long-term debt. With this increase in debt, 3358's cash and short-term investments stands at US$49m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 3358’s operating efficiency ratios such as ROA here.

Can 3358 pay its short-term liabilities?

At the current liabilities level of US$538m, it seems that the business has been able to meet these obligations given the level of current assets of US$644m, with a current ratio of 1.2x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Leisure companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can 3358 service its debt comfortably?

With debt reaching 58% of equity, 3358 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. We can test if 3358’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 3358, the ratio of 6.87x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 3358’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although 3358’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. Since there is also no concerns around 3358's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how 3358 has been performing in the past. You should continue to research Bestway Global Holding to get a more holistic view of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 3358’s future growth? Take a look at our free research report of analyst consensus for 3358’s outlook.

2. Valuation: What is 3358 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 3358 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.