Investors are always looking for growth in small-cap stocks like GL Limited (SGX:B16), with a market cap of SGD1.10B. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into B16 here.
How does B16’s operating cash flow stack up against its debt?
B16’s debt level has been constant at around $266.3M over the previous year comprising of short- and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at $76.1M for investing into the business. Moreover, B16 has generated $69.1M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 0.26x, indicating that B16’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 B16’s case, it is able to generate 0.26x cash from its debt capital.
Can B16 meet its short-term obligations with the cash in hand?
With current liabilities at $90.6M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $314.1M, with a current ratio of 3.47x. However, anything above 3x is considered high and could mean that B16 has too much idle capital in low-earning investments.
Is B16’s level of debt at an acceptable level?
B16’s level of debt is appropriate relative to its total equity, at 25.00%. B16 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether B16 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 B16’s, case, the ratio of 8.03x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Are you a shareholder? Although B16’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. You should always be researching market expectations for B16’s future growth on our free analysis platform.