Investors are always looking for growth in small-cap stocks like Health Management International Ltd (SGX:588), with a market cap of S$452m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into 588 here.
Does 588 Produce Much Cash Relative To Its Debt?
588 has built up its total debt levels in the last twelve months, from RM106m to RM246m , which accounts for long term debt. With this rise in debt, 588 currently has RM82m remaining in cash and short-term investments , ready to be used for running the business. Additionally, 588 has produced RM68m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 27%, indicating that 588’s operating cash is sufficient to cover its debt.
Can 588 meet its short-term obligations with the cash in hand?
With current liabilities at RM125m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.33x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Healthcare companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is 588’s debt level acceptable?
With a debt-to-equity ratio of 94%, 588 can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 588's case, the ratio of 8.28x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 588 ample headroom to grow its debt facilities.
Next Steps:
588’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 588's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 588's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Health Management International to get a more holistic view of the small-cap by looking at: