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Ace Achieve Infocom Limited (SGX:A75) is a small-cap stock with a market capitalization of S$6.77M. 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? Wireless Telcom businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into A75 here.
Does A75 generate an acceptable amount of cash through operations?
A75’s debt levels have fallen from CN¥233.73M to CN¥180.57M over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, A75’s cash and short-term investments stands at CN¥31.84M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of A75’s operating efficiency ratios such as ROA here.
Does A75’s liquid assets cover its short-term commitments?
With current liabilities at CN¥325.17M, it appears that the company has been able to meet these commitments with a current assets level of CN¥799.53M, leading to a 2.46x current account ratio. Usually, for Wireless Telcom companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does A75 face the risk of succumbing to its debt-load?
With debt reaching 40.72% of equity, A75 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether A75 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 A75’s, case, the ratio of 2.33x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.