In This Article:
Telechoice International Limited (SGX:T41) is a small-cap stock with a market capitalization of S$100m. 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into T41 here.
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T41’s Debt (And Cash Flows)
T41 has built up its total debt levels in the last twelve months, from S$12m to S$37m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at S$19m to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can examine some of T41’s operating efficiency ratios such as ROA here.
Can T41 meet its short-term obligations with the cash in hand?
Looking at T41’s S$79m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.63x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Electronic companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can T41 service its debt comfortably?
With debt reaching 51% of equity, T41 may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if T41’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 T41, the ratio of 6.56x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as T41’s high interest coverage is seen as responsible and safe practice.
Next Steps:
T41’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how T41 has been performing in the past. I recommend you continue to research Telechoice International to get a better picture of the small-cap by looking at: