Investors are always looking for growth in small-cap stocks like GRP Limited (SGX:BLU), with a market cap of SGD38.74M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the electronic industry, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into BLU here.
Does BLU generate enough cash through operations?
BLU has built up its total debt levels in the last twelve months, from SGD7.2M to SGD8.2M . With this rise in debt, BLU’s cash and short-term investments stands at SGD41.1M , ready to deploy into the business. On top of this, BLU has produced SGD3.9M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 46.79%, signalling that BLU’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In BLU’s case, it is able to generate 0.47x cash from its debt capital.
Can BLU meet its short-term obligations with the cash in hand?
Looking at BLU’s most recent SGD23.5M liabilities, the company has been able to meet these commitments with a current assets level of SGD106.4M, leading to a 4.53x current account ratio. Though, anything about 3x may be excessive, since BLU may be leaving too much capital in low-earning investments.
Can BLU service its debt comfortably?
With debt at 10.20% of equity, BLU may be thought of as appropriately levered. This range is considered safe as BLU is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is very low for BLU, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
Are you a shareholder? BLU’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Going forward, its financial position may be different. You should always be researching market expectations for BLU’s future growth on our free analysis platform.
Are you a potential investor? BLU’s high cash coverage and low levels of debt indicate its ability to use its borrowings efficiently in order to produce a healthy cash flow. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your conviction in the stock, you need to also examine BLU’s track record. You should continue your analysis by taking a look at BLU’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.