Investors are always looking for growth in small-cap stocks like Aspial Corporation Limited (SGX:A30), with a market cap of SGD474.44M. However, an important fact which most ignore is: how financially healthy is the business? Since A30 is loss-making right now, it’s crucial to assess 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. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into A30 here.
Does A30 generate an acceptable amount of cash through operations?
A30 has sustained its debt level by about SGD1,253.1M over the last 12 months – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at SGD230.3M for investing into the business. On top of this, A30 has produced cash from operations of SGD4.6M during the same period of time, resulting in an operating cash to total debt ratio of 0.37%, signalling that A30’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In A30’s case, it is able to generate 0x cash from its debt capital.
Can A30 meet its short-term obligations with the cash in hand?
Looking at A30’s most recent SGD585.5M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.7x. Usually, for real estate companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can A30 service its debt comfortably?
A30 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since A30 is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? A30’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that A30’s financial situation may change. You should always be researching market expectations for A30’s future growth on our free analysis platform.