While small-cap stocks, such as Cheung Woh Technologies Ltd (SGX:C50) with its market cap of SGD57.42M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that C50 is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into C50 here.
How does C50’s operating cash flow stack up against its debt?
C50’s debt levels surged from SGD11.2M to SGD14.3M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, C50 currently has SGD11.2M remaining in cash and short-term investments , ready to deploy into the business. On top of this, C50 has generated SGD13.4M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 0.93x, meaning that C50’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In C50’s case, it is able to generate 0.93x cash from its debt capital.
Does C50’s liquid assets cover its short-term commitments?
Looking at C50’s most recent SGD21.4M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.1x. For machinery companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can C50 service its debt comfortably?
With a debt-to-equity ratio of 20.36%, C50’s debt level may be seen as prudent. C50 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with C50, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? C50’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, its financial position may be different. I recommend researching market expectations for C50’s future growth on our free analysis platform.