Investors are always looking for growth in small-cap stocks like TA Corporation Ltd (SGX:PA3), with a market cap of SGD122.50M. However, an important fact which most ignore is: how financially healthy is the business? Since PA3 is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into PA3 here.
Does PA3 generate enough cash through operations?
PA3 has shrunken its total debt levels in the last twelve months, from SGD386.6M to SGD365.4M – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at SGD91.5M for investing into the business. Moreover, PA3 has generated SGD6.2M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.02x, indicating that PA3’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In PA3’s case, it is able to generate 0.02x cash from its debt capital.
Can PA3 meet its short-term obligations with the cash in hand?
At the current liabilities level of SGD240.7M liabilities, it seems that the business has been able to meet these commitments with a current assets level of SGD379.4M, leading to a 1.58x current account ratio. Generally, for construction companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is PA3’s level of debt at an acceptable level?
Since total debt levels have outpaced equities, PA3 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since PA3 is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? PA3’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may be different. You should always be keeping abreast of market expectations for PA3’s future growth on our free analysis platform.