Are AF Global Limited’s (SGX:L38) Interest Costs Too High?
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Investors are always looking for growth in small-cap stocks like AF Global Limited (SGX:L38), with a market cap of S$172m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, since poor capital management may bring about 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 recommend you dig deeper yourself into L38 here.
How does L38’s operating cash flow stack up against its debt?
L38’s debt level has been constant at around S$78m over the previous year including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at S$28m , ready to deploy into the business. On top of this, L38 has produced S$11m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 15%, signalling that L38’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In L38’s case, it is able to generate 0.15x cash from its debt capital.
Can L38 meet its short-term obligations with the cash in hand?
At the current liabilities level of S$27m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.37x. Usually, for Hospitality 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 L38 service its debt comfortably?
L38’s level of debt is appropriate relative to its total equity, at 21%. This range is considered safe as L38 is not taking on too much debt obligation, which may be constraining for future growth. We can test if L38’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 L38, the ratio of 3.38x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving L38 ample headroom to grow its debt facilities.
Next Steps:
L38’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how L38 has been performing in the past. I suggest you continue to research AF Global to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for L38’s future growth? Take a look at our free research report of analyst consensus for L38’s outlook.
Valuation: What is L38 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether L38 is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
