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While small-cap stocks, such as Stamford Tyres Corporation Limited (SGX:S29) with its market cap of S$78m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into S29 here.
How does S29’s operating cash flow stack up against its debt?
S29’s debt level has been constant at around S$89m over the previous year comprising of short- and long-term debt. At this constant level of debt, S29 currently has S$16m remaining in cash and short-term investments for investing into the business. Additionally, S29 has generated S$6m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 7.0%, meaning that S29’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In S29’s case, it is able to generate 0.07x cash from its debt capital.
Can S29 pay its short-term liabilities?
At the current liabilities level of S$97m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.73x. For Retail Distributors companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does S29 face the risk of succumbing to its debt-load?
S29 is a relatively highly levered company with a debt-to-equity of 72%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether S29 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 S29’s, case, the ratio of 2.79x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as S29’s low interest coverage already puts the company at higher risk of default.
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S29’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure S29 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Stamford Tyres to get a more holistic view of the stock by looking at: