While small-cap stocks, such as Intraco Limited (SGX:I06) with its market cap of SGD28.01M, 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 vital, 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, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into I06 here.

Does I06 generate an acceptable amount of cash through operations?

I06’s debt levels surged from SGD23.4M to SGD28.1M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, I06 currently has SGD44.4M remaining in cash and short-term investments for investing into the business. However, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. 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 I06’s operating efficiency ratios such as ROA here.

Does I06’s liquid assets cover its short-term commitments?

At the current liabilities level of SGD32.1M liabilities, the company has been able to meet these commitments with a current assets level of SGD61.4M, leading to a 1.92x current account ratio. Generally, for trade distributors companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Can I06 service its debt comfortably?

With debt at 27.96% of equity, I06 may be thought of as appropriately levered. I06 is not taking on too much debt commitment, which may be constraining for future growth. We can test if I06’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 I06, the ratio of less than 0.1x suggests is not appropriately covered lenders may be more reluctant to lend out more funding as I06’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Are you a shareholder? I06’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. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. You should always be keeping on top of market expectations for I06’s future growth on our free analysis platform.

Are you a potential investor? I06’s low-debt position gives it headroom for future growth funding in the future. Moreover, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more conviction in the stock, you need to further analyse I06’s track record. You should continue your analysis by taking a look at I06’s past performance analysis on our free platform to conclude on I06’s financial health.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.