While small-cap stocks, such as Food Empire Holdings Limited (SGX:F03) with its market cap of SGD371.00M, 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, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into F03 here.
Does F03 generate an acceptable amount of cash through operations?
Over the past year, F03 has maintained its debt levels at around $38.9M comprising of short- and long-term debt. At this current level of debt, F03 currently has $29.2M remaining in cash and short-term investments for investing into the business. Moreover, F03 has generated cash from operations of $12.7M during the same period of time, leading to an operating cash to total debt ratio of 32.75%, signalling that F03’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In F03’s case, it is able to generate 0.33x cash from its debt capital.
Can F03 meet its short-term obligations with the cash in hand?
Looking at F03’s most recent $56.0M liabilities, the company has been able to meet these obligations given the level of current assets of $119.7M, with a current ratio of 2.14x. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can F03 service its debt comfortably?
F03’s level of debt is appropriate relative to its total equity, at 21.82%. This range is considered safe as F03 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether F03 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In F03’s, case, the ratio of 25.95x suggests that interest is comfortably 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:
F03’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. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure F03 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Food Empire Holdings to get a more holistic view of the stock by looking at: