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Investors are always looking for growth in small-cap stocks like Heeton Holdings Limited (SGX:5DP), with a market cap of S$159m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into 5DP here.
How does 5DP’s operating cash flow stack up against its debt?
Over the past year, 5DP has maintained its debt levels at around S$327m which accounts for long term debt. At this stable level of debt, 5DP currently has S$72m remaining in cash and short-term investments for investing into the business. Moreover, 5DP has produced S$13m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 3.8%, meaning that 5DP’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 5DP’s case, it is able to generate 0.038x cash from its debt capital.
Can 5DP pay its short-term liabilities?
At the current liabilities level of S$123m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.41x. Usually, for Real Estate companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 5DP’s debt level acceptable?
With debt reaching 77% of equity, 5DP may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if 5DP’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 5DP, the ratio of 0.46x 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:
5DP’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure 5DP has company-specific issues impacting its capital structure decisions. You should continue to research Heeton Holdings to get a better picture of the small-cap by looking at: