While small-cap stocks, such as Halcyon Agri Corporation Limited (SGX:5VJ) with its market cap of SGD917.13M, 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 crucial, 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, this commentary is still very high-level, so I recommend you dig deeper yourself into 5VJ here.
Does 5VJ generate an acceptable amount of cash through operations?
Over the past year, 5VJ has ramped up its debt from $463.5M to $706.1M , which is made up of current and long term debt. With this increase in debt, 5VJ currently has $85.4M remaining in cash and short-term investments for investing into the business. Though its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 5VJ’s operating efficiency ratios such as ROA here.
Does 5VJ’s liquid assets cover its short-term commitments?
At the current liabilities level of $398.6M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $578.1M, with a current ratio of 1.45x. Usually, for commercial services and supplies companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 5VJ’s level of debt at an acceptable level?
With debt reaching 84.60% of equity, 5VJ may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 5VJ’s case, the ratio of 2.02x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 5VJ’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, 5VJ has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that 5VJ’s financial situation may change. I recommend keeping on top of market expectations for 5VJ’s future growth on our free analysis platform.