While small-cap stocks, such as Bonjour Holdings Limited (HKG:653) with its market cap of HK$621m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 653 is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into 653 here.

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Does 653 Produce Much Cash Relative To Its Debt?

653 has built up its total debt levels in the last twelve months, from HK$518m to HK$546m – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$238m to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can examine some of 653’s operating efficiency ratios such as ROA here.

Can 653 pay its short-term liabilities?

At the current liabilities level of HK$523m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.07x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Specialty Retail companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Does 653 face the risk of succumbing to its debt-load?

653 is a relatively highly levered company with a debt-to-equity of 91%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since 653 is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

653’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 653 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Bonjour Holdings to get a better picture of the small-cap by looking at:

1. Historical Performance: What has 653's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

2. 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.

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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.