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While small-cap stocks, such as Wing Tai Holdings Limited (SGX:W05) with its market cap of S$1.50b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health 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. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into W05 here.
Does W05 produce enough cash relative to debt?
W05’s debt levels have fallen from S$938.6m to S$780.1m over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, W05 currently has S$792.2m remaining in cash and short-term investments for investing into the business. On top of this, W05 has produced cash from operations of S$105.9m over the same time period, leading to an operating cash to total debt ratio of 13.6%, meaning that W05’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In W05’s case, it is able to generate 0.14x cash from its debt capital.
Can W05 meet its short-term obligations with the cash in hand?
With current liabilities at S$151.5m, the company has been able to meet these obligations given the level of current assets of S$1.57b, with a current ratio of 10.39x. However, a ratio greater than 3x may be considered as quite high, and some might argue W05 could be holding too much capital in a low-return investment environment.
Does W05 face the risk of succumbing to its debt-load?
W05’s level of debt is appropriate relative to its total equity, at 22.0%. This range is considered safe as W05 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether W05 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 W05’s, case, the ratio of 0.95x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as W05’s low interest coverage already puts the company at higher risk of default.
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W05’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. 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 W05 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Wing Tai Holdings to get a more holistic view of the stock by looking at: