Compact Metal Industries Ltd (SGX:T4E) is a small-cap stock with a market capitalization of S$181.24M. 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? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into T4E here.
How does T4E’s operating cash flow stack up against its debt?
T4E’s debt levels surged from S$3.49M to S$6.83M over the last 12 months , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at S$28.61M , ready to deploy into the business. Moreover, T4E has produced S$2.89M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 42.39%, signalling that T4E’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In T4E’s case, it is able to generate 0.42x cash from its debt capital.
Does T4E’s liquid assets cover its short-term commitments?
At the current liabilities level of S$28.10M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of S$75.26M, with a current ratio of 2.68x. For Building 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.
Does T4E face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 2.73%, T4E’s debt level is relatively low. T4E is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether T4E 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 T4E’s, case, the ratio of 142x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving T4E ample headroom to grow its debt facilities.
Next Steps:
T4E has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how T4E has been performing in the past. I suggest you continue to research Compact Metal Industries to get a better picture of the stock by looking at: