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While small-cap stocks, such as AF Global Limited (SGX:L38) with its market cap of S$226.96m, 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, 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. However, this commentary is still very high-level, so I suggest you dig deeper yourself into L38 here.
Does L38 produce enough cash relative to debt?
L38 has sustained its debt level by about S$81.35m over the last 12 months made up of current and long term debt. At this stable level of debt, L38’s cash and short-term investments stands at S$26.26m for investing into the business. Moreover, L38 has produced cash from operations of S$11.56m during the same period of time, leading to an operating cash to total debt ratio of 14.21%, signalling that L38’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In L38’s case, it is able to generate 0.14x cash from its debt capital.
Does L38’s liquid assets cover its short-term commitments?
At the current liabilities level of S$28.94m liabilities, the company has been able to meet these commitments with a current assets level of S$35.38m, leading to a 1.22x current account ratio. For Hospitality 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.
Can L38 service its debt comfortably?
L38’s level of debt is appropriate relative to its total equity, at 22.40%. L38 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether L38 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In L38’s, case, the ratio of 3.63x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as L38’s high interest coverage is seen as responsible and safe practice.
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L38’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure L38 has company-specific issues impacting its capital structure decisions. You should continue to research AF Global to get a more holistic view of the stock by looking at: