While small-cap stocks, such as Straco Corporation Limited (SGX:S85) with its market cap of SGD709.91M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, 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. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into S85 here.
Does S85 generate an acceptable amount of cash through operations?
S85’s debt levels have fallen from SGD73.9M to SGD61.9M over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at SGD164.5M , ready to deploy into the business. On top of this, S85 has generated SGD67.1M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 108.35%, signalling that S85’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 S85’s case, it is able to generate 1.08x cash from its debt capital.
Can S85 pay its short-term liabilities?
Looking at S85’s most recent SGD24.7M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of SGD171.2M, with a current ratio of 6.94x. However, a ratio greater than 3x may be considered as too high, as S85 could be holding too much capital in a low-return investment environment.
Can S85 service its debt comfortably?
With a debt-to-equity ratio of 19.54%, S85’s debt level may be seen as prudent. This range is considered safe as S85 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
Next Steps:
Are you a shareholder? S85 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Moving forward, its financial position may change. I suggest researching market expectations for S85’s future growth on our free analysis platform.
Are you a potential investor? Although S85’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your conviction in the stock, you need to also analyse S85’s track record. You should continue your analysis by taking a look at S85’s past performance analysis on our free platform to conclude on S85’s financial health.
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.