While small-cap stocks, such as Cityneon Holdings Limited (SGX:5HJ) with its market cap of SGD229.98M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 5HJ here.
Does 5HJ generate an acceptable amount of cash through operations?
5HJ has built up its total debt levels in the last twelve months, from SGD11.9M to SGD28.3M made up of predominantly near term debt. With this growth in debt, 5HJ’s cash and short-term investments stands at SGD24.5M , ready to deploy into the business. On top of this, 5HJ has generated cash from operations of SGD3.9M during the same period of time, resulting in an operating cash to total debt ratio of 13.91%, signalling that 5HJ’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 5HJ’s case, it is able to generate 0.14x cash from its debt capital.
Can 5HJ meet its short-term obligations with the cash in hand?
Looking at 5HJ’s most recent SGD49.6M liabilities, it seems that the business has been able to meet these commitments with a current assets level of SGD65.9M, leading to a 1.33x current account ratio. For commercial services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can 5HJ service its debt comfortably?
5HJ is a relatively highly levered company with a debt-to-equity of 41.10%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 5HJ 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 5HJ’s, case, the ratio of 16.14x suggests that interest is excessively covered, which means that debtors may be willing to loan the company more money, giving 5HJ ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, 5HJ has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. I suggest researching market expectations for 5HJ’s future growth on our free analysis platform.