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Keong Hong Holdings Limited (SGX:5TT) is a small-cap stock with a market capitalization of S$132.46M. 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, as mismanagement of capital can lead to 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 5TT here.
Does 5TT generate enough cash through operations?
5TT’s debt levels surged from S$63.53M to S$103.89M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at S$76.80M for investing into the business. Additionally, 5TT has generated S$15.55M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 14.97%, indicating that 5TT’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 5TT’s case, it is able to generate 0.15x cash from its debt capital.
Does 5TT’s liquid assets cover its short-term commitments?
With current liabilities at S$169.91M, the company has been able to meet these obligations given the level of current assets of S$336.34M, with a current ratio of 1.98x. For Construction 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.
Is 5TT’s debt level acceptable?
5TT is a relatively highly levered company with a debt-to-equity of 49.27%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Next Steps:
At its current level of cash flow coverage, 5TT has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 5TT’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Keong Hong Holdings to get a better picture of the stock by looking at: