YHI International Limited (SGX:BPF) is a small-cap stock with a market capitalization of SGD128.61M. 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? Assessing first and foremost the financial health is crucial, since poor capital management may bring about 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, since I only look at basic financial figures, I recommend you dig deeper yourself into BPF here.
Does BPF generate enough cash through operations?
BPF’s debt levels have fallen from SGD126.3M to SGD98.4M over the last 12 months – this includes both the current and long-term debt. With this debt payback, BPF currently has SGD53.6M remaining in cash and short-term investments for investing into the business. Moreover, BPF has generated cash from operations of SGD44.3M over the same time period, leading to an operating cash to total debt ratio of 0.45x, indicating that BPF’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 BPF’s case, it is able to generate 0.45x cash from its debt capital.
Does BPF’s liquid assets cover its short-term commitments?
Looking at BPF’s most recent SGD122.1M liabilities, the company has been able to meet these commitments with a current assets level of SGD272.5M, leading to a 2.23x current account ratio. For retail distributors 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.
Is BPF’s level of debt at an acceptable level?
With debt at 36.13% of equity, BPF may be thought of as appropriately levered. This range is considered safe as BPF is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if BPF’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 BPF, the ratio of 4.34x 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.
Next Steps:
Are you a shareholder? BPF’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that BPF’s financial situation may change. You should always be researching market expectations for BPF’s future growth on our free analysis platform.