While small-cap stocks, such as BreadTalk Group Limited (SGX:CTN) with its market cap of S$504m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CTN here.

Does CTN produce enough cash relative to debt?

CTN’s debt levels surged from S$160m to S$254m over the last 12 months , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at S$216m , ready to deploy into the business. Additionally, CTN has produced S$63m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 25%, signalling that CTN’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CTN’s case, it is able to generate 0.25x cash from its debt capital.

Can CTN pay its short-term liabilities?

At the current liabilities level of S$314m, it appears that the company may not have an easy time meeting these commitments with a current assets level of S$293m, leading to a current ratio of 0.93x.

Can CTN service its debt comfortably?

CTN 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. We can check to see whether CTN is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CTN’s, case, the ratio of 4.63x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CTN’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although CTN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, 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 CTN has company-specific issues impacting its capital structure decisions. I suggest you continue to research BreadTalk Group to get a more holistic view of the stock by looking at: