Compact Metal Industries Ltd (SGX:T4E) is a small-cap stock with a market capitalization of SGD254.87M. 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? Given that T4E is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into T4E here.

Does T4E generate an acceptable amount of cash through operations?

Over the past year, T4E has ramped up its debt from SGD1.9M to SGD3.5M – this includes both the current and long-term debt. With this increase in debt, T4E’s cash and short-term investments stands at SGD32.4M , ready to deploy into the business. Though its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of T4E’s operating efficiency ratios such as ROA here.

Does T4E’s liquid assets cover its short-term commitments?

Looking at T4E’s most recent SGD8.3M liabilities, it appears that the company has been able to meet these commitments with a current assets level of SGD57.6M, leading to a 6.95x current account ratio. However, a ratio greater than 3x may be considered as too high, as T4E could be holding too much capital in a low-return investment environment.

Can T4E service its debt comfortably?

With debt at 7.22% of equity, T4E may be thought of as having low leverage. This range is considered safe as T4E is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. T4E’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

Are you a shareholder? Although T4E’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. I recommend researching market expectations for T4E’s future growth on our free analysis platform.