KSH Holdings Limited (SGX:ER0) is a small-cap stock with a market capitalization of S$361.78M. 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? Evaluating financial health as part of your investment thesis is crucial, 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into ER0 here.

How does ER0’s operating cash flow stack up against its debt?

ER0 has shrunken its total debt levels in the last twelve months, from S$139.57M to S$66.73M , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at S$116.11M for investing into the business. On top of this, ER0 has generated cash from operations of S$8.88M during the same period of time, leading to an operating cash to total debt ratio of 13.31%, indicating that ER0’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ER0’s case, it is able to generate 0.13x cash from its debt capital.

Can ER0 pay its short-term liabilities?

Looking at ER0’s most recent S$126.44M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of S$183.42M, with a current ratio of 1.45x. Generally, for Construction companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does ER0 face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 24.33%, ER0’s debt level may be seen as prudent. ER0 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether ER0 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 ER0’s, case, the ratio of 21.75x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.