While small-cap stocks, such as Lorenzo International Limited (SGX:5IE) with its market cap of S$8.35M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Consumer Durables businesses operating in the environment facing headwinds from current disruption, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 5IE here.

How does 5IE’s operating cash flow stack up against its debt?

5IE has shrunken its total debt levels in the last twelve months, from S$17.23M to S$14.96M made up of predominantly near term debt. With this debt repayment, 5IE currently has S$1.59M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 5IE’s operating efficiency ratios such as ROA here.

Can 5IE pay its short-term liabilities?

With current liabilities at S$29.52M, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.73x, which is below the prudent industry ratio of 3x.

Is 5IE’s debt level acceptable?

Since total debt levels have outpaced equities, 5IE is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since 5IE is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

With a high level of debt on its balance sheet, 5IE could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for 5IE to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure 5IE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Lorenzo International to get a more holistic view of the stock by looking at: