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While small-cap stocks, such as Duty Free International Limited (SGX:5SO) with its market cap of S$261.88M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into 5SO here.

Does 5SO generate enough cash through operations?

Over the past year, 5SO has ramped up its debt from RM7.07M to RM16.37M , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at RM376.23M for investing into the business. Additionally, 5SO has produced RM123.60M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 755.24%, signalling that 5SO’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 5SO’s case, it is able to generate 7.55x cash from its debt capital.

Can 5SO pay its short-term liabilities?

Looking at 5SO’s most recent RM144.99M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.04x. Though, anything about 3x may be excessive, since 5SO may be leaving too much capital in low-earning investments.

Is 5SO’s debt level acceptable?

With a debt-to-equity ratio of 2.73%, 5SO’s debt level is relatively low. 5SO is not taking on too much debt commitment, which may be constraining for future growth.

Next Steps:

5SO’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 5SO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Duty Free International to get a more holistic view of the stock by looking at:

1. Valuation: What is 5SO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 5SO is currently mispriced by the market.

2. Historical Performance: What has 5SO’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.