While small-cap stocks, such as CEI Limited (SGX:AVV) with its market cap of S$75m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Electronic industry, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into AVV here.
How does AVV’s operating cash flow stack up against its debt?
Over the past year, AVV has ramped up its debt from S$2.0m to S$5.0m . With this increase in debt, AVV’s cash and short-term investments stands at S$4.1m for investing into the business. Moreover, AVV has produced cash from operations of S$796k over the same time period, resulting in an operating cash to total debt ratio of 16%, indicating that AVV’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AVV’s case, it is able to generate 0.16x cash from its debt capital.
Can AVV meet its short-term obligations with the cash in hand?
Looking at AVV’s S$32m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.99x. Usually, for Electronic companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can AVV service its debt comfortably?
With a debt-to-equity ratio of 13%, AVV’s debt level may be seen as prudent. This range is considered safe as AVV is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether AVV 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 AVV’s, case, the ratio of 188x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving AVV ample headroom to grow its debt facilities.
Next Steps:
AVV has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure AVV has company-specific issues impacting its capital structure decisions. You should continue to research CEI to get a more holistic view of the stock by looking at: