Investors are always looking for growth in small-cap stocks like mDR LIMITED (SGX:A27), with a market cap of S$37.58M. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. 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 suggest you dig deeper yourself into A27 here.
How does A27’s operating cash flow stack up against its debt?
Over the past year, A27 has ramped up its debt from S$1.79M to S$6.59M , which is made up of current and long term debt. With this increase in debt, A27’s cash and short-term investments stands at S$11.58M for investing into the business. Moreover, A27 has generated S$3.19M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 48.34%, indicating that A27’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In A27’s case, it is able to generate 0.48x cash from its debt capital.
Can A27 meet its short-term obligations with the cash in hand?
At the current liabilities level of S$24.59M liabilities, it seems that the business has been able to meet these commitments with a current assets level of S$61.10M, leading to a 2.48x current account ratio. Usually, for Electronic companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does A27 face the risk of succumbing to its debt-load?
With debt at 10.28% of equity, A27 may be thought of as appropriately levered. A27 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders.
Next Steps:
A27 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how A27 has been performing in the past. I suggest you continue to research mDR to get a better picture of the stock by looking at:
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1. Historical Performance: What has A27’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.