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Vinda International Holdings Limited (HKG:3331) is a small-cap stock with a market capitalization of HK$16b. 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 vital, as mismanagement of capital can lead to 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. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into 3331 here.

Does 3331 Produce Much Cash Relative To Its Debt?

3331 has sustained its debt level by about HK$5.2b over the last 12 months including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at HK$677m to keep the business going. Moreover, 3331 has produced cash from operations of HK$1.3b over the same time period, leading to an operating cash to total debt ratio of 25%, indicating that 3331’s current level of operating cash is high enough to cover debt.

Can 3331 pay its short-term liabilities?

At the current liabilities level of HK$5.6b, the company has been able to meet these commitments with a current assets level of HK$5.8b, leading to a 1.02x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Household Products 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.

Does 3331 face the risk of succumbing to its debt-load?

3331 is a relatively highly levered company with a debt-to-equity of 60%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 3331's case, the ratio of 5.08x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 3331’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although 3331’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 3331's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 3331's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Vinda International Holdings to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 3331’s future growth? Take a look at our free research report of analyst consensus for 3331’s outlook.

2. Valuation: What is 3331 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 3331 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.