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Lee Metal Group Limited (SGX:593) is a small-cap stock with a market capitalization of S$196.94M. 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? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 593 here.
How does 593’s operating cash flow stack up against its debt?
Over the past year, 593 has ramped up its debt from S$89.33M to S$128.82M , which is mainly comprised of near term debt. With this rise in debt, the current cash and short-term investment levels stands at S$51.55M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 593’s operating efficiency ratios such as ROA here.
Can 593 pay its short-term liabilities?
At the current liabilities level of S$199.67M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.66x. For Metals and Mining companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 593’s debt level acceptable?
With a debt-to-equity ratio of 86.02%, 593 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 593 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 593’s, case, the ratio of 5.78x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 593 ample headroom to grow its debt facilities.
Next Steps:
At its current level of cash flow coverage, 593 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 593’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Lee Metal Group to get a more holistic view of the stock by looking at: