What Does Overseas Education Limited's (SGX:RQ1) Balance Sheet Tell Us About It?

Simply Wall St

Sat, Apr 6, 2019, 8:15 PM

Overseas Education Limited (SGX:RQ1) is a small-cap stock with a market capitalization of S$133m. 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into RQ1 here.

Does RQ1 Produce Much Cash Relative To Its Debt?

RQ1 has shrunk its total debt levels in the last twelve months, from S$135m to S$118m – this includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at S$42m to keep the business going. Moreover, RQ1 has produced cash from operations of S$25m in the last twelve months, resulting in an operating cash to total debt ratio of 21%, meaning that RQ1’s operating cash is sufficient to cover its debt.

Can RQ1 meet its short-term obligations with the cash in hand?

With current liabilities at S$154m, it appears that the company may not be able to easily meet these obligations given the level of current assets of S$44m, with a current ratio of 0.29x. The current ratio is calculated by dividing current assets by current liabilities.

Can RQ1 service its debt comfortably?

RQ1 is a relatively highly levered company with a debt-to-equity of 82%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether RQ1 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 RQ1's, case, the ratio of 2.41x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as RQ1’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Although RQ1’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for RQ1's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Overseas Education to get a better picture of the stock by looking at: