While small-cap stocks, such as Far East Orchard Limited (SGX:O10) with its market cap of SGD629.20M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is 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. However, since I only look at basic financial figures, I recommend you dig deeper yourself into O10 here.
How does O10’s operating cash flow stack up against its debt?
O10 has built up its total debt levels in the last twelve months, from SGD293.1M to SGD343.7M , which comprises of short- and long-term debt. With this rise in debt, O10 currently has SGD209.3M remaining in cash and short-term investments for investing into the business. Additionally, O10 has generated cash from operations of SGD38.0M over the same time period, resulting in an operating cash to total debt ratio of 11.05%, indicating that O10’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In O10’s case, it is able to generate 0.11x cash from its debt capital.
Does O10’s liquid assets cover its short-term commitments?
Looking at O10’s most recent SGD296.0M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.31x. Usually, for Real Estate 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.
Does O10 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 16.67%, O10’s debt level may be seen as prudent. This range is considered safe as O10 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if O10’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 O10, the ratio of 18.1x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving O10 ample headroom to grow its debt facilities.
Next Steps:
Although O10’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 an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for O10’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Far East Orchard to get a more holistic view of the stock by looking at: