While small-cap stocks, such as Cortina Holdings Limited (SGX:C41) with its market cap of SGD140.74M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into C41 here.
Does C41 generate enough cash through operations?
C41 has shrunken its total debt levels in the last twelve months, from SGD86.2M to SGD72.2M – this includes both the current and long-term debt. With this reduction in debt, C41’s cash and short-term investments stands at SGD21.8M , ready to deploy into the business. On top of this, C41 has produced cash from operations of SGD33.9M during the same period of time, resulting in an operating cash to total debt ratio of 46.94%, signalling that C41’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In C41’s case, it is able to generate 0.47x cash from its debt capital.
Can C41 pay its short-term liabilities?
Looking at C41’s most recent SGD86.0M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.76x. Generally, for specialty retail companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is C41’s level of debt at an acceptable level?
C41 is a relatively highly levered company with a debt-to-equity of 42.57%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if C41’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 C41, the ratio of 9.78x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving C41 ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? Although C41’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may be different. You should always be keeping abreast of market expectations for C41’s future growth on our free analysis platform.