What Does Travelite Holdings Ltd.'s (SGX:BCZ) Balance Sheet Tell Us About It?

Simply Wall St

Thu, Jul 18, 2019, 7:10 PM

Travelite Holdings Ltd. (SGX:BCZ) is a small-cap stock with a market capitalization of S$7.1m. 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? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into BCZ here.

Does BCZ Produce Much Cash Relative To Its Debt?

BCZ has sustained its debt level by about S$25m over the last 12 months – this includes long-term debt. At this stable level of debt, BCZ currently has S$9.9m remaining in cash and short-term investments to keep the business going. Moreover, BCZ has generated S$3.6m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 15%, meaning that BCZ’s debt is not covered by operating cash.

Can BCZ meet its short-term obligations with the cash in hand?

With current liabilities at S$20m, it seems that the business has been able to meet these obligations given the level of current assets of S$35m, with a current ratio of 1.74x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Luxury companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can BCZ service its debt comfortably?

BCZ is a relatively highly levered company with a debt-to-equity of 87%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BCZ's case, the ratio of 0.78x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as BCZ’s low interest coverage already puts the company at higher risk of default.