While small-cap stocks, such as Singamas Container Holdings Limited (HKG:716) with its market cap of HK$2.9b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into 716 here.
716’s Debt (And Cash Flows)
716's debt levels have fallen from US$428m to US$381m over the last 12 months , which also accounts for long term debt. With this debt payback, the current cash and short-term investment levels stands at US$120m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can examine some of 716’s operating efficiency ratios such as ROA here.
Can 716 pay its short-term liabilities?
At the current liabilities level of US$481m, the company has been able to meet these commitments with a current assets level of US$823m, leading to a 1.71x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 716’s debt level acceptable?
With a debt-to-equity ratio of 55%, 716 can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether 716 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 716's, case, the ratio of 20.84x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as 716’s high interest coverage is seen as responsible and safe practice.
Although 716’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 716's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how 716 has been performing in the past. I recommend you continue to research Singamas Container Holdings to get a better picture of the small-cap by looking at:
- Historical Performance: What has 716's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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.