Is Arts Optical International Holdings Limited’s (HKG:1120) Balance Sheet A Threat To Its Future?

While small-cap stocks, such as Arts Optical International Holdings Limited ( SEHK:1120 ) with its market cap of HK$867.05M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Medical Equipment companies, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I'd encourage you to dig deeper yourself into 1120 here .

How does 1120's operating cash flow stack up against its debt?

1120's debt levels surged from HK$68.7M to HK$218.9M over the last 12 months made up of predominantly near term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$629.1M , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn't be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article's sake, I won't be looking at this today, but you can examine some of 1120's operating efficiency ratios such as ROA here .

Can 1120 meet its short-term obligations with the cash in hand?

At the current liabilities level of HK$646.2M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.79x. For Medical Equipment companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too capital in low return investments.

Is 1120's debt level acceptable?

With a debt-to-equity ratio of 8.32%, 1120's debt level is relatively low. This range is considered safe as 1120 is not taking on too much debt obligation, which may be constraining for future growth.

Next Steps:

Although 1120's debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven't considered other factors such as how 1120 has been performing in the past. I suggest you continue to research Arts Optical International Holdings to get a more holistic view of the stock by looking at:

• 1. Historical Performance: What has 1120'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.

• 2. 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 .