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Tat Hong Holdings Ltd (SGX:T03) is a small-cap stock with a market capitalization of S$369.07M. 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? Since T03 is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into T03 here.
Does T03 generate enough cash through operations?
T03 has shrunken its total debt levels in the last twelve months, from S$549.30M to S$449.90M , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at S$114.28M , ready to deploy into the business. On top of this, T03 has produced S$85.18M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 18.93%, signalling that T03’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In T03’s case, it is able to generate 0.19x cash from its debt capital.
Can T03 pay its short-term liabilities?
With current liabilities at S$299.10M, it seems that the business has been able to meet these obligations given the level of current assets of S$456.43M, with a current ratio of 1.53x. Usually, for Trade Distributors companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is T03’s debt level acceptable?
T03 is a relatively highly levered company with a debt-to-equity of 67.96%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since T03 is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
T03’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how T03 has been performing in the past. I recommend you continue to research Tat Hong Holdings to get a better picture of the stock by looking at: