In This Article:
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mm2 Asia Ltd. (SGX:1B0) is a small-cap stock with a market capitalization of S$366m. 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 essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into 1B0 here.
1B0’s Debt (And Cash Flows)
Over the past year, 1B0 has ramped up its debt from S$29m to S$215m – this includes long-term debt. With this increase in debt, 1B0 currently has S$36m remaining in cash and short-term investments , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 1B0’s operating efficiency ratios such as ROA here.
Does 1B0’s liquid assets cover its short-term commitments?
With current liabilities at S$206m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.11x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Entertainment companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is 1B0’s debt level acceptable?
1B0 is a relatively highly levered company with a debt-to-equity of 81%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1B0's case, the ratio of 4.44x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 1B0 ample headroom to grow its debt facilities.