While small-cap stocks, such as Dyna-Mac Holdings Limited (SGX:NO4) with its market cap of S$111m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Energy Services companies, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into NO4 here.
How does NO4’s operating cash flow stack up against its debt?
Over the past year, NO4 has ramped up its debt from S$13m to S$20m – this includes both the current and long-term debt. With this growth in debt, NO4’s cash and short-term investments stands at S$25m , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of NO4’s operating efficiency ratios such as ROA here.
Can NO4 meet its short-term obligations with the cash in hand?
Looking at NO4’s most recent S$55m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.15x. Generally, for Energy Services companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is NO4’s debt level acceptable?
NO4’s level of debt is appropriate relative to its total equity, at 19%. NO4 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. NO4’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
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NO4’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how NO4 has been performing in the past. You should continue to research Dyna-Mac Holdings to get a more holistic view of the stock by looking at: