While small-cap stocks, such as Luxking Group Holdings Limited (SGX:BKK) with its market cap of SGD5.06M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into BKK here.
Does BKK generate an acceptable amount of cash through operations?
Over the past year, BKK has reduced its debt from CN¥168.7M to CN¥152.4M , which is made up of current and long term debt. With this debt repayment, BKK currently has CN¥19.7M remaining in cash and short-term investments , ready to deploy into the business. Additionally, BKK has generated CN¥25.0M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 16.41%, signalling that BKK’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BKK’s case, it is able to generate 0.16x cash from its debt capital.
Can BKK pay its short-term liabilities?
Looking at BKK’s most recent CN¥151.2M liabilities, the company has been able to meet these obligations given the level of current assets of CN¥267.7M, with a current ratio of 1.77x. Usually, for Commercial Services companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is BKK’s debt level acceptable?
BKK is a relatively highly levered company with a debt-to-equity of 89.55%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if BKK’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For BKK, the ratio of 1.58x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
BKK’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. I admit this is a fairly basic analysis for BKK’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Luxking Group Holdings to get a more holistic view of the stock by looking at: