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While small-cap stocks, such as Wine's Link International Holdings Limited (HKG:8509) with its market cap of HK$212m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about 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. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into 8509 here.

8509’s Debt (And Cash Flows)

8509's debt levels surged from HK$129m to HK$143m over the last 12 months made up of predominantly near term debt. With this growth in debt, 8509's cash and short-term investments stands at HK$46m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 8509’s operating efficiency ratios such as ROA here.

Can 8509 meet its short-term obligations with the cash in hand?

With current liabilities at HK$160m, it appears that the company has been able to meet these commitments with a current assets level of HK$338m, leading to a 2.11x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Retail Distributors companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Can 8509 service its debt comfortably?

With a debt-to-equity ratio of 76%, 8509 can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if 8509’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 8509, the ratio of 6.5x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 8509 ample headroom to grow its debt facilities.

Next Steps:

Although 8509’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how 8509 has been performing in the past. You should continue to research Wine's Link 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 8509’s future growth? Take a look at our free research report of analyst consensus for 8509’s outlook.

2. Historical Performance: What has 8509'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.