Lian Beng Group Ltd (SGX:L03) is a small-cap stock with a market capitalization of S$274.83m. 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into L03 here.
How much cash does L03 generate through its operations?
Over the past year, L03 has ramped up its debt from S$497.10m to S$705.95m , which is made up of current and long term debt. With this growth in debt, L03 currently has S$196.79m remaining in cash and short-term investments , ready to deploy into the business. Additionally, L03 has produced cash from operations of S$46.82m over the same time period, leading to an operating cash to total debt ratio of 6.63%, signalling that L03’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 L03’s case, it is able to generate 0.066x cash from its debt capital.
Does L03’s liquid assets cover its short-term commitments?
At the current liabilities level of S$540.66m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of S$622.90m, with a current ratio of 1.15x. Generally, for Construction companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does L03 face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, L03 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some 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 after interest and tax at least three times its net interest payments is considered financially sound. In L03’s case, the ratio of 7.89x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as L03’s high interest coverage is seen as responsible and safe practice.