Investors are always looking for growth in small-cap stocks like Singapore Shipping Corporation Limited (SGX:S19), with a market cap of SGD126.74M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, 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. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into S19 here.
Does S19 generate an acceptable amount of cash through operations?
S19’s debt levels have fallen from $97.9M to $78.0M over the last 12 months – this includes both the current and long-term debt. With this debt repayment, S19’s cash and short-term investments stands at $12.2M for investing into the business. On top of this, S19 has produced $24.6M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 31.49%, signalling that S19’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 S19’s case, it is able to generate 0.31x cash from its debt capital.
Can S19 pay its short-term liabilities?
With current liabilities at $14.9M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $15.6M, with a current ratio of 1.05x. Generally, for shipping 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 S19 service its debt comfortably?
With debt reaching 91.08% of equity, S19 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 check to see whether S19 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 S19’s, case, the ratio of 5.03x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as S19’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Are you a shareholder? Although S19’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around S19’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. You should always be keeping on top of market expectations for S19’s future growth on our free analysis platform.