While small-cap stocks, such as Delfi Limited (SGX:P34) with its market cap of SGD794.50M, 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into P34 here.
Does P34 generate an acceptable amount of cash through operations?
Over the past year, P34 has reduced its debt from $74.7M to $53.8M , which comprises of short- and long-term debt. With this debt repayment, P34’s cash and short-term investments stands at $69.3M , ready to deploy into the business. Additionally, P34 has produced cash from operations of $59.7M over the same time period, resulting in an operating cash to total debt ratio of 1.11x, meaning that P34’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In P34’s case, it is able to generate 1.11x cash from its debt capital.
Can P34 meet its short-term obligations with the cash in hand?
With current liabilities at $118.2M liabilities, the company has been able to meet these obligations given the level of current assets of $202.7M, with a current ratio of 1.71x. Generally, for food companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is P34’s level of debt at an acceptable level?
With debt at 20.92% of equity, P34 may be thought of as appropriately levered. This range is considered safe as P34 is not taking on too much debt obligation, which may be constraining for future growth. We can test if P34’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 P34, the ratio of 17.16x suggests that interest is excessively covered, which means that debtors may be willing to loan the company more money, giving P34 ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? P34’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, P34’s financial situation may change. You should always be keeping abreast of market expectations for P34’s future growth on our free analysis platform.