Keong Hong Holdings Limited (SGX:5TT) is a small-cap stock with a market capitalization of SGD134.78M. 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? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into 5TT here.
How does 5TT’s operating cash flow stack up against its debt?
5TT’s debt levels surged from SGD63.5M to SGD98.8M over the last 12 months , which is made up of current and long term debt. With this growth in debt, 5TT’s cash and short-term investments stands at SGD77.3M , ready to deploy into the business. Additionally, 5TT has produced cash from operations of SGD2.1M over the same time period, leading to an operating cash to total debt ratio of 0.02x, indicating that 5TT’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 5TT’s case, it is able to generate 0.02x cash from its debt capital.
Does 5TT’s liquid assets cover its short-term commitments?
Looking at 5TT’s most recent SGD169.2M liabilities, it seems that the business has been able to meet these commitments with a current assets level of SGD336.3M, leading to a 1.99x current account ratio. For construction 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 5TT face the risk of succumbing to its debt-load?
With debt reaching 50.29% of equity, 5TT may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Next Steps:
Are you a shareholder? 5TT’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. 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 be different. I suggest researching market expectations for 5TT’s future growth on our free analysis platform.
Are you a potential investor? Although near-term liquidity isn’t an issue, 5TT’s large debt ratio on top of poor cash coverage may scare some investors away intially. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of 5TT’s track record. As a following step, you should take a look at 5TT’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.