Investors are always looking for growth in small-cap stocks like Centurion Corporation Limited (SGX:OU8), with a market cap of SGD458.22M. However, an important fact which most ignore is: how financially healthy is the business? 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 few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into OU8 here.
Does OU8 generate an acceptable amount of cash through operations?
OU8 has sustained its debt level by about SGD660.4M over the last 12 months – this includes both the current and long-term debt. At this current level of debt, OU8’s cash and short-term investments stands at SGD82.5M , ready to deploy into the business. Additionally, OU8 has generated cash from operations of SGD69.5M over the same time period, resulting in an operating cash to total debt ratio of 10.53%, meaning that OU8’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In OU8’s case, it is able to generate 0.11x cash from its debt capital.
Does OU8’s liquid assets cover its short-term commitments?
At the current liabilities level of SGD97.6M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.04x. Generally, for Real Estate companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is OU8’s debt level acceptable?
With total debt exceeding equities, OU8 is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if OU8’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 OU8, the ratio of 3.83x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as OU8’s high interest coverage is seen as responsible and safe practice.
Next Steps:
OU8’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. This is only a rough assessment of financial health, and I’m sure OU8 has company-specific issues impacting its capital structure decisions. You should continue to research Centurion to get a more holistic view of the stock by looking at: