Gallant Venture Ltd (SGX:5IG) is a small-cap stock with a market capitalization of SGD636.90M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to 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, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 5IG here.
Does 5IG generate an acceptable amount of cash through operations?
5IG’s debt level has been constant at around SGD2,438.9M over the previous year comprising of short- and long-term debt. At this stable level of debt, 5IG currently has SGD425.4M remaining in cash and short-term investments for investing into the business. Additionally, 5IG has produced cash from operations of SGD57.5M during the same period of time, leading to an operating cash to total debt ratio of 0.02x, meaning that 5IG’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 5IG’s case, it is able to generate 0.02x cash from its debt capital.
Does 5IG’s liquid assets cover its short-term commitments?
With current liabilities at SGD1,458.4M liabilities, it seems that the business has been able to meet these commitments with a current assets level of SGD2,293.6M, leading to a 1.57x current account ratio. Generally, for industrial conglomerates companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 5IG’s level of debt at an acceptable level?
Since total debt levels have outpaced equities, 5IG is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, 5IG has room for improvement to better cushion for events which may require debt repayment. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that 5IG’s financial situation may change. I recommend researching market expectations for 5IG’s future growth on our free analysis platform.