In This Article:
The Straits Trading Company Limited (SGX:S20) is a small-cap stock with a market capitalization of S$889.65M. 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. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into S20 here.
How does S20’s operating cash flow stack up against its debt?
Over the past year, S20 has ramped up its debt from S$619.81M to S$769.56M , which is made up of current and long term debt. With this increase in debt, S20 currently has S$440.39M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of S20’s operating efficiency ratios such as ROA here.
Can S20 pay its short-term liabilities?
Looking at S20’s most recent S$293.87M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of S$702.29M, with a current ratio of 2.39x. Usually, for Metals and Mining companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can S20 service its debt comfortably?
With debt reaching 55.32% of equity, S20 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if S20’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 S20, the ratio of 1.35x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
At its current level of cash flow coverage, S20 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for S20’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Straits Trading to get a more holistic view of the stock by looking at: