Sinarmas Land Limited (SGX:A26) is a small-cap stock with a market capitalization of S$1.45b. 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? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to 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 A26 here.
How does A26’s operating cash flow stack up against its debt?
Over the past year, A26 has ramped up its debt from S$1.26b to S$1.75b , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at S$1.14b for investing into the business. Additionally, A26 has produced cash from operations of S$529.73m over the same time period, leading to an operating cash to total debt ratio of 30.21%, indicating that A26’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In A26’s case, it is able to generate 0.3x cash from its debt capital.
Can A26 meet its short-term obligations with the cash in hand?
With current liabilities at S$1.04b, it seems that the business has been able to meet these commitments with a current assets level of S$2.77b, leading to a 2.65x current account ratio. Usually, for Real Estate companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can A26 service its debt comfortably?
With debt reaching 42.74% of equity, A26 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. We can test if A26’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For A26, the ratio of 16.59x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving A26 ample headroom to grow its debt facilities.
Next Steps:
A26’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around A26’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for A26’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Sinarmas Land to get a more holistic view of the small-cap by looking at: