GuocoLand Limited (SGX:F17) is a small-cap stock with a market capitalization of SGD2.45B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? 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. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into F17 here.
Does F17 generate enough cash through operations?
F17’s debt levels surged from SGD4,040.4M to SGD4,667.2M over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, F17’s cash and short-term investments stands at SGD1,122.5M , ready to deploy into the business. However, 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 examine some of F17’s operating efficiency ratios such as ROA here.
Can F17 meet its short-term obligations with the cash in hand?
At the current liabilities level of SGD2,491.9M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.84x. Generally, for real estate companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can F17 service its debt comfortably?
Since total debt levels have outpaced equities, F17 is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether F17 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 F17’s, case, the ratio of 2.53x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, F17 has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that F17’s financial situation may change. I suggest researching market expectations for F17’s future growth on our free analysis platform.