While small-cap stocks, such as Tai Sin Electric Limited (SGX:500) with its market cap of SGD174.21M, 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 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. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into 500 here.
Does 500 generate enough cash through operations?
500 has shrunken its total debt levels in the last twelve months, from SGD37.2M to SGD10.1M . With this debt payback, the current cash and short-term investment levels stands at SGD22.1M for investing into the business. Moreover, 500 has generated cash from operations of SGD37.4M during the same period of time, leading to an operating cash to total debt ratio of 369.42%, signalling that 500’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 500’s case, it is able to generate 3.69x cash from its debt capital.
Can 500 meet its short-term obligations with the cash in hand?
At the current liabilities level of SGD44.0M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.84x. Though, anything about 3x may be excessive, since 500 may be leaving too much capital in low-earning investments.
Is 500’s level of debt at an acceptable level?
With a debt-to-equity ratio of 9.39%, 500’s debt level is relatively low. This range is considered safe as 500 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 500 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In 500’s, case, the ratio of 47.46x suggests that interest is excessively covered, which means that lenders may be less hesitant to lend out more funding as 500’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Are you a shareholder? 500’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Going forward, its financial position may change. I recommend researching market expectations for 500’s future growth on our free analysis platform.