In This Article:
Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Investors are always looking for growth in small-cap stocks like Centurion Corporation Limited (SGX:OU8), with a market cap of S$349m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to 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, since I only look at basic financial figures, I recommend you dig deeper yourself into OU8 here.
How much cash does OU8 generate through its operations?
Over the past year, OU8 has ramped up its debt from S$662m to S$696m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at S$82m for investing into the business. On top of this, OU8 has produced cash from operations of S$52m over the same time period, leading to an operating cash to total debt ratio of 7.5%, meaning that OU8’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In OU8’s case, it is able to generate 0.075x cash from its debt capital.
Does OU8’s liquid assets cover its short-term commitments?
With current liabilities at S$102m, the company may not have an easy time meeting these commitments with a current assets level of S$100m, leading to a current ratio of 0.99x.
Does OU8 face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, OU8 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if OU8’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 OU8, the ratio of 2.89x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
Although OU8’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for OU8’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Centurion to get a better picture of the stock by looking at: