Investors are always looking for growth in small-cap stocks like The Hour Glass Limited (SGX:AGS), with a market cap of SGD461.78M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the specialty retail industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into AGS here.
Does AGS generate enough cash through operations?
AGS has shrunken its total debt levels in the last twelve months, from SGD63.4M to SGD51.2M , which comprises of short- and long-term debt. With this debt payback, AGS’s cash and short-term investments stands at SGD127.2M for investing into the business. Moreover, AGS has generated SGD66.5M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 130.05%, signalling that AGS’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AGS’s case, it is able to generate 1.3x cash from its debt capital.
Does AGS’s liquid assets cover its short-term commitments?
At the current liabilities level of SGD104.4M liabilities, the company has been able to meet these commitments with a current assets level of SGD450.7M, leading to a 4.32x current account ratio. However, a ratio greater than 3x may be considered as too high, as AGS could be holding too much capital in a low-return investment environment.
Can AGS service its debt comfortably?
With debt at 10.77% of equity, AGS may be thought of as appropriately levered. AGS is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether AGS 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 AGS’s, case, the ratio of 78.88x suggests that interest is excessively covered, which means that debtors may be willing to loan the company more money, giving AGS ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? AGS has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, its financial position may be different. I recommend keeping on top of market expectations for AGS’s future growth on our free analysis platform.