Investors are always looking for growth in small-cap stocks like KSH Holdings Limited (SGX:ER0), with a market cap of SGD472.88M. However, an important fact which most ignore is: how financially healthy is the business? 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. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into ER0 here.
Does ER0 generate enough cash through operations?
Over the past year, ER0 has reduced its debt from SGD139.6M to SGD66.7M – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at SGD116.1M for investing into the business. Additionally, ER0 has produced cash from operations of SGD8.9M in the last twelve months, leading to an operating cash to total debt ratio of 13.31%, signalling 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 meet its short-term obligations with the cash in hand?
At the current liabilities level of SGD126.4M liabilities, it appears that the company has been able to meet these commitments with a current assets level of SGD183.4M, leading to a 1.45x current account ratio. Usually, for Construction 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 ER0 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 25.22%, ER0’s debt level may be seen as prudent. This range is considered safe as ER0 is not taking on too much debt obligation, which may be constraining for future growth. We can test if ER0’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 ER0, the ratio of 24.36x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as ER0’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although ER0’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. Keep in mind I haven’t considered other factors such as how ER0 has been performing in the past. I recommend you continue to research KSH Holdings to get a more holistic view of the stock by looking at: