While small-cap stocks, such as Hor Kew Corporation Limited (SGX:BBP) with its market cap of SGD22.13M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since BBP is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into BBP here.
Does BBP generate enough cash through operations?
BBP’s debt levels have fallen from SGD67.3M to SGD61.3M over the last 12 months – this includes both the current and long-term debt. With this debt payback, BBP’s cash and short-term investments stands at SGD29.4M , ready to deploy into the business. Additionally, BBP has generated SGD1.1M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.02x, indicating that BBP’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In BBP’s case, it is able to generate 0.02x cash from its debt capital.
Can BBP meet its short-term obligations with the cash in hand?
With current liabilities at SGD54.9M liabilities, the company has been able to meet these obligations given the level of current assets of SGD94.2M, with a current ratio of 1.71x. Usually, for construction companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does BBP face the risk of succumbing to its debt-load?
With debt reaching 63.44% of equity, BBP may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since BBP is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? BBP’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. Given that its financial position may change. I recommend keeping abreast of market expectations for BBP’s future growth on our free analysis platform.