Is Casa Holdings Limited's (SGX:C04) Balance Sheet A Threat To Its Future?

Simply Wall St

Thu, Jun 6, 2019, 7:45 PM

Casa Holdings Limited (SGX:C04) is a small-cap stock with a market capitalization of S$12m. 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? Understanding the company's financial health becomes essential, 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, these checks don't give you a full picture, so I suggest you dig deeper yourself into C04 here.

Does C04 Produce Much Cash Relative To Its Debt?

C04's debt levels have fallen from S$37m to S$33m over the last 12 months , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at S$2.4m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of C04’s operating efficiency ratios such as ROA here.

Can C04 pay its short-term liabilities?

With current liabilities at S$9.7m, it seems that the business has been able to meet these commitments with a current assets level of S$12m, leading to a 1.24x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Retail Distributors companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Does C04 face the risk of succumbing to its debt-load?

With debt reaching 60% of equity, C04 may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses.

Next Steps:

Although C04’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 C04'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 C04 has been performing in the past. You should continue to research Casa Holdings to get a better picture of the small-cap by looking at: