While small-cap stocks, such as Stamford Land Corporation Ltd (SGX:H07) with its market cap of SGD427.72M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into H07 here.
Does H07 generate enough cash through operations?
H07’s debt levels surged from SGD340.4M to SGD364.9M over the last 12 months , which is made up of current and long term debt. With this increase in debt, H07’s cash and short-term investments stands at SGD122.5M for investing into the business. Though 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 examine some of H07’s operating efficiency ratios such as ROA here.
Can H07 pay its short-term liabilities?
Looking at H07’s most recent SGD45.8M liabilities, the company has been able to meet these obligations given the level of current assets of SGD387.3M, with a current ratio of 8.46x. However, a ratio greater than 3x may be considered as too high, as H07 could be holding too much capital in a low-return investment environment.
Does H07 face the risk of succumbing to its debt-load?
With debt reaching 60.90% of equity, H07 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. We can test if H07’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For H07, the ratio of 7.88x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as H07’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Are you a shareholder? H07’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, H07’s financial situation may change. I suggest keeping abreast of market expectations for H07’s future growth on our free analysis platform.