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While small-cap stocks, such as Enviro-Hub Holdings Ltd (SGX:L23) with its market cap of S$37.21M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since L23 is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into L23 here.
Does L23 generate an acceptable amount of cash through operations?
L23 has shrunken its total debt levels in the last twelve months, from S$425.43M to S$109.51M , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at S$21.27M for investing into the business. Moreover, L23 has generated cash from operations of S$13.46M over the same time period, leading to an operating cash to total debt ratio of 12.29%, signalling that L23’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In L23’s case, it is able to generate 0.12x cash from its debt capital.
Can L23 meet its short-term obligations with the cash in hand?
At the current liabilities level of S$19.34M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.65x. Generally, for Metals and Mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does L23 face the risk of succumbing to its debt-load?
L23 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since L23 is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
At its current level of cash flow coverage, L23 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure L23 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Enviro-Hub Holdings to get a more holistic view of the stock by looking at: