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While small-cap stocks, such as Mencast Holdings Ltd (SGX:5NF) with its market cap of S$37.16M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Energy Services companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 5NF here.
Does 5NF generate enough cash through operations?
5NF has sustained its debt level by about S$193.63M over the last 12 months – this includes both the current and long-term debt. At this constant level of debt, 5NF’s cash and short-term investments stands at S$14.99M for investing into the business. On top of this, 5NF has produced cash from operations of S$16.65M over the same time period, leading to an operating cash to total debt ratio of 8.60%, signalling that 5NF’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In 5NF’s case, it is able to generate 0.086x cash from its debt capital.
Does 5NF’s liquid assets cover its short-term commitments?
Looking at 5NF’s most recent S$210.92M liabilities, the company has not been able to meet these commitments with a current assets level of S$44.14M, leading to a 0.21x current account ratio. which is under the appropriate industry ratio of 3x.
Can 5NF service its debt comfortably?
5NF is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since 5NF is currently 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.
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With a high level of debt on its balance sheet, 5NF 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 5NF 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. I admit this is a fairly basic analysis for 5NF’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Mencast Holdings to get a better picture of the stock by looking at: