While small-cap stocks, such as Frencken Group Limited (SGX:E28) with its market cap of SGD226.93M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, since poor capital management may bring about 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, this commentary is still very high-level, so I recommend you dig deeper yourself into E28 here.
How does E28’s operating cash flow stack up against its debt?
E28’s debt levels surged from SGD51.9M to SGD58.7M over the last 12 months , which is made up of current and long term debt. With this growth in debt, E28’s cash and short-term investments stands at SGD19.9M for investing into the business. Additionally, E28 has produced SGD18.5M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 31.43%, signalling that E28’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In E28’s case, it is able to generate 0.31x cash from its debt capital.
Can E28 meet its short-term obligations with the cash in hand?
With current liabilities at SGD142.2M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of SGD229.8M, with a current ratio of 1.62x. For machinery companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is E28’s level of debt at an acceptable level?
With a debt-to-equity ratio of 23.18%, E28’s debt level may be seen as prudent. E28 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether E28 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 E28’s, case, the ratio of 37.1x suggests that interest is excessively covered, which means that debtors may be willing to loan the company more money, giving E28 ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? E28’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. 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 change. I recommend keeping on top of market expectations for E28’s future growth on our free analysis platform.