Pharmesis International Ltd (SGX:BFK) is a small-cap stock with a market capitalization of S$7.48M. 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? Companies operating in the Pharmaceuticals industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I recommend you dig deeper yourself into BFK here.

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

BFK has sustained its debt level by about CN¥15.00M over the last 12 months made up of predominantly near term debt. At this current level of debt, BFK currently has CN¥35.49M remaining in cash and short-term investments for investing into the business. Additionally, BFK has generated cash from operations of CN¥2.68M over the same time period, leading to an operating cash to total debt ratio of 17.86%, meaning that BFK’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In BFK’s case, it is able to generate 0.18x cash from its debt capital.

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

Looking at BFK’s most recent CN¥30.20M liabilities, the company has been able to meet these commitments with a current assets level of CN¥78.19M, leading to a 2.59x current account ratio. Usually, for Pharmaceuticals companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Can BFK service its debt comfortably?

With debt at 15.78% of equity, BFK may be thought of as appropriately levered. BFK is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with BFK, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

Although BFK’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for BFK’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Pharmesis International to get a better picture of the stock by looking at: