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Investors are always looking for growth in small-cap stocks like Swee Hong Limited (SGX:QF6), with a market cap of S$36.82M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, 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. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into QF6 here.
Does QF6 generate enough cash through operations?
Over the past year, QF6 has reduced its debt from S$22.18M to S$6.43M , which is mainly comprised of near term debt. With this reduction in debt, the current cash and short-term investment levels stands at S$1.20M 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of QF6’s operating efficiency ratios such as ROA here.
Can QF6 pay its short-term liabilities?
With current liabilities at S$26.54M, the company has been able to meet these obligations given the level of current assets of S$28.85M, with a current ratio of 1.09x. Generally, for Construction companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does QF6 face the risk of succumbing to its debt-load?
QF6 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if QF6’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 QF6, the ratio of 3.89x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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QF6’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for QF6’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Swee Hong to get a better picture of the stock by looking at: