Thakral Corporation Ltd (SGX:AWI) is a small-cap stock with a market capitalization of S$57m. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into AWI here.

Does AWI produce enough cash relative to debt?

AWI’s debt levels have fallen from S$84m to S$56m over the last 12 months – this includes long-term debt. With this debt repayment, AWI currently has S$44m 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. For this article’s sake, I won’t be looking at this today, but you can examine some of AWI’s operating efficiency ratios such as ROA here.

Can AWI pay its short-term liabilities?

At the current liabilities level of S$75m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.3x. Usually, for Retail Distributors companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is AWI’s debt level acceptable?

With debt at 33% of equity, AWI may be thought of as appropriately levered. AWI is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether AWI 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 AWI’s, case, the ratio of 4.82x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AWI ample headroom to grow its debt facilities.

Next Steps:

AWI has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure AWI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Thakral to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for AWI’s future growth? Take a look at our free research report of analyst consensus for AWI’s outlook.

2. Valuation: What is AWI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AWI is currently mispriced by the market.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.