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While small-cap stocks, such as Combine Will International Holdings Limited (SGX:N0Z) with its market cap of S$30.71M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since N0Z is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into N0Z here.
How does N0Z’s operating cash flow stack up against its debt?
N0Z has shrunken its total debt levels in the last twelve months, from HK$743.49M to HK$347.62M , which is mainly comprised of near term debt. With this reduction in debt, N0Z’s cash and short-term investments stands at HK$43.39M , ready to deploy into the business. On top of this, N0Z has produced HK$35.49M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 10.21%, signalling that N0Z’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In N0Z’s case, it is able to generate 0.1x cash from its debt capital.
Can N0Z pay its short-term liabilities?
With current liabilities at HK$597.33M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.57x. For Leisure 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.
Does N0Z face the risk of succumbing to its debt-load?
N0Z is a relatively highly levered company with a debt-to-equity of 45.27%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since N0Z is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
N0Z’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure N0Z has company-specific issues impacting its capital structure decisions. You should continue to research Combine Will International Holdings to get a better picture of the stock by looking at: