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While small-cap stocks, such as SunVic Chemical Holdings Limited (SGX:A7S) with its market cap of S$35.64M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that A7S is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into A7S here.
Does A7S generate enough cash through operations?
A7S’s debt levels have fallen from CN¥1.55B to CN¥1.14B over the last 12 months – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at CN¥262.22M for investing into the business. On top of this, A7S has generated cash from operations of CN¥308.88M over the same time period, resulting in an operating cash to total debt ratio of 27.16%, signalling that A7S’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In A7S’s case, it is able to generate 0.27x cash from its debt capital.
Can A7S pay its short-term liabilities?
At the current liabilities level of CN¥1.61B liabilities, it appears that the company is not able to meet these obligations given the level of current assets of CN¥1.35B, with a current ratio of 0.84x below the prudent level of 3x.
Does A7S face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, A7S is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since A7S is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
A7S’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure A7S has company-specific issues impacting its capital structure decisions. I recommend you continue to research SunVic Chemical Holdings to get a better picture of the stock by looking at: