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Maanshan Iron & Steel Company Limited (HKG:323) is a small-cap stock with a market capitalization of HK$28b. 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into 323 here.

Does 323 Produce Much Cash Relative To Its Debt?

323 has shrunk its total debt levels in the last twelve months, from CN¥19b to CN¥18b , which also accounts for long term debt. With this debt repayment, 323 currently has CN¥9.0b remaining in cash and short-term investments to keep the business going. On top of this, 323 has generated CN¥11b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 61%, meaning that 323’s operating cash is sufficient to cover its debt.

Can 323 pay its short-term liabilities?

With current liabilities at CN¥39b, it seems that the business may not have an easy time meeting these commitments with a current assets level of CN¥38b, leading to a current ratio of 0.98x. The current ratio is the number you get when you divide current assets by current liabilities.

Is 323’s debt level acceptable?

323 is a relatively highly levered company with a debt-to-equity of 56%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies.

Next Steps:

323’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for 323's financial health. Other important fundamentals need to be considered alongside. You should continue to research Maanshan Iron & Steel to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 323’s future growth? Take a look at our free research report of analyst consensus for 323’s outlook.

2. Valuation: What is 323 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 323 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.