ISDN Holdings Limited (SGX:I07) is a small-cap stock with a market capitalization of SGD90.78M. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about 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. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into I07 here.
Does I07 generate an acceptable amount of cash through operations?
I07 has shrunken its total debt levels in the last twelve months, from SGD14.8M to SGD13.7M , which comprises of short- and long-term debt. With this reduction in debt, I07 currently has SGD39.4M remaining in cash and short-term investments for investing into the business. Moreover, I07 has produced SGD12.4M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 90.53%, indicating that I07’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In I07’s case, it is able to generate 0.91x cash from its debt capital.
Can I07 meet its short-term obligations with the cash in hand?
At the current liabilities level of SGD80.3M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of SGD163.9M, with a current ratio of 2.04x. For Electrical companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can I07 service its debt comfortably?
With a debt-to-equity ratio of 9.52%, I07’s debt level is relatively low. I07 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether I07 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In I07’s, case, the ratio of 44.48x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as I07’s high interest coverage is seen as responsible and safe practice.