Investors are always looking for growth in small-cap stocks like China ZhongDi Dairy Holdings Company Limited (HKG:1492), with a market cap of HK$1.0b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about 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. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 1492 here.

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1492’s Debt (And Cash Flows)

1492 has built up its total debt levels in the last twelve months, from CN¥1.7b to CN¥2.2b – this includes long-term debt. With this increase in debt, 1492's cash and short-term investments stands at CN¥615m to keep the business going. On top of this, 1492 has produced cash from operations of CN¥475m during the same period of time, resulting in an operating cash to total debt ratio of 22%, indicating that 1492’s operating cash is sufficient to cover its debt.

Does 1492’s liquid assets cover its short-term commitments?

With current liabilities at CN¥1.5b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.74x. The current ratio is the number you get when you divide current assets by current liabilities.

Can 1492 service its debt comfortably?

With total debt exceeding equity, 1492 is considered a highly levered company. 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 1492's case, the ratio of 7.02x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 1492’s high interest coverage is seen as responsible and safe practice.

Next Steps:

1492’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for 1492's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China ZhongDi Dairy Holdings to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 1492’s future growth? Take a look at our free research report of analyst consensus for 1492’s outlook.

2. Historical Performance: What has 1492'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.

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.