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Investors are always looking for growth in small-cap stocks like First Resources Limited (SGX:EB5), with a market cap of S$2.6b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into EB5 here.
Does EB5 produce enough cash relative to debt?
EB5’s debt levels have fallen from US$468m to US$400m over the last 12 months – this includes both the current and long-term debt. With this debt repayment, EB5’s cash and short-term investments stands at US$91m for investing into the business. Additionally, EB5 has produced US$169m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 42%, signalling that EB5’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EB5’s case, it is able to generate 0.42x cash from its debt capital.
Can EB5 meet its short-term obligations with the cash in hand?
With current liabilities at US$110m, it seems that the business has been able to meet these commitments with a current assets level of US$318m, leading to a 2.88x current account ratio. For Food 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.
Does EB5 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 42%, EB5 can be considered as an above-average leveraged company. 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 EB5’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 EB5, the ratio of 11.29x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as EB5’s high interest coverage is seen as responsible and safe practice.
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EB5’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. Keep in mind I haven’t considered other factors such as how EB5 has been performing in the past. You should continue to research First Resources to get a more holistic view of the small-cap by looking at: