Investors are always looking for growth in small-cap stocks like Asian Pay Television Trust (SGX:S7OU), with a market cap of S$826.16M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into S7OU here.

Does S7OU generate an acceptable amount of cash through operations?

S7OU has built up its total debt levels in the last twelve months, from S$1.31B to S$1.40B , which is made up of current and long term debt. With this rise in debt, S7OU’s cash and short-term investments stands at S$66.84M , ready to deploy into the business. On top of this, S7OU has generated S$188.34M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 13.49%, indicating that S7OU’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 S7OU’s case, it is able to generate 0.13x cash from its debt capital.

Can S7OU meet its short-term obligations with the cash in hand?

With current liabilities at S$109.12M, it seems that the business has not been able to meet these commitments with a current assets level of S$79.96M, leading to a 0.73x current account ratio. which is under the appropriate industry ratio of 3x.

Is S7OU’s debt level acceptable?

S7OU is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if S7OU’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 S7OU, the ratio of 2.09x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as S7OU’s low interest coverage already puts the company at higher risk of default.

Next Steps:

With a high level of debt on its balance sheet, S7OU could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for S7OU to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure S7OU has company-specific issues impacting its capital structure decisions. You should continue to research Asian Pay Television Trust to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.