While small-cap stocks, such as Manufacturing Integration Technology Ltd (SGX:M11) with its market cap of SGD58.46M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Semiconductor companies, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into M11 here.
How does M11’s operating cash flow stack up against its debt?
Over the past year, M11 has reduced its debt from SGD4.7M to SGD3.8M , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at SGD17.9M , ready to deploy into the business. On top of this, M11 has produced SGD2.7M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.73x, meaning that M11’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In M11’s case, it is able to generate 0.73x cash from its debt capital.
Does M11’s liquid assets cover its short-term commitments?
With current liabilities at SGD14.3M liabilities, it appears that the company has been able to meet these commitments with a current assets level of SGD44.7M, leading to a 3.13x current account ratio. However, anything above 3x is considered high and could mean that M11 has too much idle capital in low-earning investments.
Can M11 service its debt comfortably?
M11’s level of debt is low relative to its total equity, at 6.81%. This range is considered safe as M11 is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is virtually non-existent with M11, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? M11 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Going forward, its financial position may be different. You should always be researching market expectations for M11’s future growth on our free analysis platform.