Investors are always looking for growth in small-cap stocks like EnGro Corporation Limited (SGX:S44), with a market cap of S$110.91M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into S44 here.

How does S44’s operating cash flow stack up against its debt?

S44’s debt levels have fallen from S$10.55M to S$8.52M over the last 12 months , which is made up of current and long term debt. With this debt repayment, S44’s cash and short-term investments stands at S$49.98M , 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. For this article’s sake, I won’t be looking at this today, but you can assess some of S44’s operating efficiency ratios such as ROA here.

Can S44 meet its short-term obligations with the cash in hand?

At the current liabilities level of S$23.87M liabilities, it seems that the business has been able to meet these commitments with a current assets level of S$113.82M, leading to a 4.77x current account ratio. Though, a ratio greater than 3x may be considered as too high, as S44 could be holding too much capital in a low-return investment environment.

Can S44 service its debt comfortably?

S44’s level of debt is low relative to its total equity, at 3.94%. S44 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether S44 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In S44’s, case, the ratio of 10.71x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving S44 ample headroom to grow its debt facilities.

Next Steps:

S44’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure S44 has company-specific issues impacting its capital structure decisions. You should continue to research EnGro to get a more holistic view of the stock by looking at:

• 1. Historical Performance: What has S44’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.

• 2. 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.