ASL Marine Holdings Ltd (SGX:A04) is a small-cap stock with a market capitalization of SGD74.25M. 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? Since A04 is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into A04 here.
Does A04 generate enough cash through operations?
A04 has shrunken its total debt levels in the last twelve months, from SGD593.1M to SGD549.5M , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at SGD36.8M , ready to deploy into the business. Additionally, A04 has produced cash from operations of SGD85.9M over the same time period, leading to an operating cash to total debt ratio of 0.16x, signalling that A04’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In A04’s case, it is able to generate 0.16x cash from its debt capital.
Can A04 meet its short-term obligations with the cash in hand?
Looking at A04’s most recent SGD427.8M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.15x. For machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can A04 service its debt comfortably?
A04 is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since A04 is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, A04 has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that A04’s financial situation may change. I suggest researching market expectations for A04’s future growth on our free analysis platform.