mm2 Asia Ltd (SGX:1B0) is a small-cap stock with a market capitalization of S$430.2m. 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? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 1B0 here.

Does 1B0 produce enough cash relative to debt?

1B0 has built up its total debt levels in the last twelve months, from S$10.9m to S$227.2m , which comprises of short- and long-term debt. With this increase in debt, 1B0’s cash and short-term investments stands at S$54.4m , ready to deploy into the business. On top of this, 1B0 has produced S$3.5m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 1.6%, signalling that 1B0’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 1B0’s case, it is able to generate 0.016x cash from its debt capital.

Does 1B0’s liquid assets cover its short-term commitments?

With current liabilities at S$204.5m, the company has been able to meet these commitments with a current assets level of S$219.6m, leading to a 1.07x current account ratio. For Media companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

Can 1B0 service its debt comfortably?

With a debt-to-equity ratio of 91.8%, 1B0 can be considered as an above-average leveraged company. 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 1B0’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 1B0, the ratio of 11.81x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 1B0’s high interest coverage is seen as responsible and safe practice.

Next Steps:

1B0’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 1B0’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research mm2 Asia to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 1B0’s future growth? Take a look at our free research report of analyst consensus for 1B0’s outlook.

2. Valuation: What is 1B0 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1B0 is currently mispriced by the market.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.