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Investors are always looking for growth in small-cap stocks like Telechoice International Limited (SGX:T41), with a market cap of S$111m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into T41 here.
Does T41 produce enough cash relative to debt?
T41 has built up its total debt levels in the last twelve months, from S$15m to S$16m made up of predominantly near term debt. With this increase in debt, T41’s cash and short-term investments stands at S$27m , ready to deploy into the business. Moreover, T41 has generated S$3m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 16%, meaning that T41’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In T41’s case, it is able to generate 0.16x cash from its debt capital.
Can T41 meet its short-term obligations with the cash in hand?
At the current liabilities level of S$107m liabilities, the company has been able to meet these commitments with a current assets level of S$156m, leading to a 1.46x current account ratio. Usually, for Electronic companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is T41’s debt level acceptable?
T41’s level of debt is appropriate relative to its total equity, at 23%. T41 is not taking on too much debt commitment, which may be constraining for future growth. We can test if T41’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For T41, the ratio of 10.61x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although T41’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. This is only a rough assessment of financial health, and I’m sure T41 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Telechoice International to get a more holistic view of the stock by looking at: