While small-cap stocks, such as Frencken Group Limited (SGX:E28) with its market cap of S$231.38M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into E28 here.

How does E28’s operating cash flow stack up against its debt?

E28 has built up its total debt levels in the last twelve months, from S$58.74M to S$63.61M , which is made up of current and long term debt. With this growth in debt, E28’s cash and short-term investments stands at S$69.79M , ready to deploy into the business. On top of this, E28 has generated cash from operations of S$34.87M in the last twelve months, leading to an operating cash to total debt ratio of 54.82%, meaning that E28’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In E28’s case, it is able to generate 0.55x cash from its debt capital.

Does E28’s liquid assets cover its short-term commitments?

At the current liabilities level of S$163.49M liabilities, it appears that the company has been able to meet these commitments with a current assets level of S$294.13M, leading to a 1.8x current account ratio. Usually, for Machinery companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is E28’s debt level acceptable?

With a debt-to-equity ratio of 27.81%, E28’s debt level may be seen as prudent. This range is considered safe as E28 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether E28 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 E28’s, case, the ratio of 1031x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as E28’s high interest coverage is seen as responsible and safe practice.

Next Steps:

E28’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for E28’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Frencken Group to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for E28’s future growth? Take a look at our free research report of analyst consensus for E28’s outlook.

2. Historical Performance: What has E28’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.