Sin Heng Heavy Machinery Limited (SGX:BKA) is a small-cap stock with a market capitalization of SGD52.45M. 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? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into BKA here.
How does BKA’s operating cash flow stack up against its debt?
BKA has shrunken its total debt levels in the last twelve months, from SGD83.4M to SGD62.7M , which is made up of current and long term debt. With this debt payback, BKA’s cash and short-term investments stands at SGD26.1M , ready to deploy into the business. On top of this, BKA has produced cash from operations of SGD34.0M during the same period of time, resulting in an operating cash to total debt ratio of 0.54x, signalling that BKA’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BKA’s case, it is able to generate 0.54x cash from its debt capital.
Does BKA’s liquid assets cover its short-term commitments?
Looking at BKA’s most recent SGD39.4M liabilities, it appears that the company has been able to meet these commitments with a current assets level of SGD64.1M, leading to a 1.63x current account ratio. For trade distributors companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can BKA service its debt comfortably?
With a debt-to-equity ratio of 51.07%, BKA can be considered as an above-average 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 BKA 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 BKA’s, case, the ratio of 3.01x 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.