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While small-cap stocks, such as Grand Banks Yachts Limited (SGX:G50) with its market cap of S$61.72M, 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 crucial, 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. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into G50 here.
Does G50 generate an acceptable amount of cash through operations?
G50 has shrunken its total debt levels in the last twelve months, from S$3.60M to S$2.74M , which comprises of short- and long-term debt. With this reduction in debt, G50 currently has S$15.87M remaining in cash and short-term investments for investing into the business. Additionally, G50 has generated S$5.11M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 186.81%, meaning that G50’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In G50’s case, it is able to generate 1.87x cash from its debt capital.
Can G50 pay its short-term liabilities?
Looking at G50’s most recent S$19.00M liabilities, it seems that the business has been able to meet these commitments with a current assets level of S$36.27M, leading to a 1.91x current account ratio. For Machinery companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does G50 face the risk of succumbing to its debt-load?
G50’s level of debt is low relative to its total equity, at 5.55%. G50 is not taking on too much debt commitment, which may be constraining for future growth. We can test if G50’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 G50, the ratio of 18.38x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving G50 ample headroom to grow its debt facilities.
Next Steps:
G50 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, 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 G50 has company-specific issues impacting its capital structure decisions. You should continue to research Grand Banks Yachts to get a more holistic view of the stock by looking at: