Fragrance Group Limited (SGX:F31) is a small-cap stock with a market capitalization of SGD1.07B. 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? Assessing first and foremost the financial health is essential, 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, I know these factors are very high-level, so I suggest you dig deeper yourself into F31 here.
How does F31’s operating cash flow stack up against its debt?
F31 has shrunken its total debt levels in the last twelve months, from SGD979.2M to SGD860.0M , which is made up of current and long term debt. With this debt payback, F31 currently has SGD51.4M remaining in cash and short-term investments , ready to deploy into the business. Additionally, F31 has produced cash from operations of SGD102.7M in the last twelve months, leading to an operating cash to total debt ratio of 11.94%, meaning that F31’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 F31’s case, it is able to generate 0.12x cash from its debt capital.
Can F31 pay its short-term liabilities?
Looking at F31’s most recent SGD277.6M liabilities, the company has been able to meet these obligations given the level of current assets of SGD665.0M, with a current ratio of 2.4x. For real estate companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does F31 face the risk of succumbing to its debt-load?
F31 is a relatively highly levered company with a debt-to-equity of 95.55%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In F31’s case, the ratio of 2.1x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as F31’s low interest coverage already puts the company at higher risk of default.