While small-cap stocks, such as Raffles United Holdings Ltd (SGX:K22) with its market cap of S$17m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into K22 here.

How much cash does K22 generate through its operations?

K22 has shrunken its total debt levels in the last twelve months, from S$36m to S$31m – this includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at S$4.8m for investing into the business. On top of this, K22 has generated cash from operations of S$6.0m in the last twelve months, resulting in an operating cash to total debt ratio of 19%, indicating that K22’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In K22’s case, it is able to generate 0.19x cash from its debt capital.

Can K22 pay its short-term liabilities?

With current liabilities at S$29m, it appears that the company has been able to meet these commitments with a current assets level of S$46m, leading to a 1.57x current account ratio. For Trade Distributors companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is K22’s debt level acceptable?

K22’s level of debt is appropriate relative to its total equity, at 35%. This range is considered safe as K22 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether K22 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In K22’s, case, the ratio of 4.1x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as K22’s high interest coverage is seen as responsible and safe practice.

Next Steps:

K22’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how K22 has been performing in the past. You should continue to research Raffles United Holdings to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for K22’s future growth? Take a look at our free research report of analyst consensus for K22’s outlook.

2. Valuation: What is K22 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 K22 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.