Hiap Seng Engineering Ltd (SGX:510) is a small-cap stock with a market capitalization of S$37.06M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Energy Services industry, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into 510 here.
Does 510 generate enough cash through operations?
510 has built up its total debt levels in the last twelve months, from S$5.22M to S$6.21M made up of predominantly near term debt. With this increase in debt, 510’s cash and short-term investments stands at S$9.92M , ready to deploy into the business. Additionally, 510 has produced S$2.16M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 34.73%, signalling that 510’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 510’s case, it is able to generate 0.35x cash from its debt capital.
Can 510 pay its short-term liabilities?
Looking at 510’s most recent S$30.66M 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 2.15x. Generally, for Energy Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 510 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 38.53%, 510’s debt level may be seen as prudent. 510 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. 510’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.
Next Steps:
510 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, 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 510’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Hiap Seng Engineering to get a more holistic view of the stock by looking at: