While small-cap stocks, such as Bonvests Holdings Limited (SGX:B28) with its market cap of SGD562.58M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into B28 here.
Does B28 generate enough cash through operations?
B28’s debt levels have fallen from SGD242.5M to SGD220.6M over the last 12 months – this includes both the current and long-term debt. With this debt repayment, B28’s cash and short-term investments stands at SGD100.2M , ready to deploy into the business. Moreover, B28 has generated cash from operations of SGD48.9M during the same period of time, leading to an operating cash to total debt ratio of 0.22x, meaning that B28’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In B28’s case, it is able to generate 0.22x cash from its debt capital.
Can B28 meet its short-term obligations with the cash in hand?
At the current liabilities level of SGD157.6M liabilities, the company is not able to meet these obligations given the level of current assets of SGD133.1M, with a current ratio of 0.84x below the prudent level of 3x.
Is B28’s level of debt at an acceptable level?
With a debt-to-equity ratio of 21.72%, B28’s debt level may be seen as prudent. This range is considered safe as B28 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether B28 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In B28’s, case, the ratio of 5.33x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving B28 ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? B28 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Though, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, B28’s financial situation may change. I recommend researching market expectations for B28’s future growth on our free analysis platform.