Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Singapore Post Limited (SGX:S08) with a market-capitalization of SGD2.88B, rarely draw their attention and few analysts cover them. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Mid-caps are found to be more volatile than the large-caps but safer than small-caps, largely due to their weaker balance sheet. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. See our latest analysis for Singapore Post
Does S08 face the risk of succumbing to its debt-load?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. S08’s debt-to-equity ratio stands at 17.32%, which means its debt level does not pose a threat to its operations right now. We can test if S08’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings (EBIT) should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. S08’s profits amply covers interest at 14.33 times, which is seen as relatively safe. Lenders may be less hesitant to lend out more funding as S08’s high interest coverage is seen as responsible and safe practice.
Can S08 meet its short-term obligations with the cash in hand?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. We need to assess S08’s cash and other liquid assets against its upcoming expenses. Our analysis shows that S08 is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? Although S08’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. Given that S08’s capital structure may be different in the future, I encourage assessing market expectations for S08’s future growth on our free analysis platform.
Are you a potential investor? Although understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. After all, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. S08’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.