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Investors are always looking for growth in small-cap stocks like SIIC Environment Holdings Ltd (SGX:BHK), with a market cap of S$755.9m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into BHK here.
How does BHK’s operating cash flow stack up against its debt?
BHK’s debt levels surged from CN¥10.83b to CN¥11.93b over the last 12 months – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at CN¥1.18b for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of BHK’s operating efficiency ratios such as ROA here.
Does BHK’s liquid assets cover its short-term commitments?
With current liabilities at CN¥7.33b, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.54x.
Does BHK face the risk of succumbing to its debt-load?
With total debt exceeding equities, BHK is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether BHK is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BHK’s, case, the ratio of 2.03x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
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With a high level of debt on its balance sheet, BHK could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for BHK to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure BHK has company-specific issues impacting its capital structure decisions. I recommend you continue to research SIIC Environment Holdings to get a better picture of the stock by looking at: