While small-cap stocks, such as G K Goh Holdings Limited (SGX:G41) with its market cap of S$312m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis 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. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into G41 here.
How much cash does G41 generate through its operations?
G41 has shrunken its total debt levels in the last twelve months, from S$191m to S$121m , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at S$73m , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of G41’s operating efficiency ratios such as ROA here.
Can G41 pay its short-term liabilities?
With current liabilities at S$58m, it seems that the business has been able to meet these commitments with a current assets level of S$98m, leading to a 1.68x current account ratio. For Professional Services 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 G41 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 26%, G41’s debt level may be seen as prudent. This range is considered safe as G41 is not taking on too much debt obligation, which may be constraining for future growth. We can test if G41’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 G41, the ratio of 2.24x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
Although G41’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 G41 has been performing in the past. I recommend you continue to research G. K. Goh Holdings to get a more holistic view of the stock by looking at: