While small-cap stocks, such as Envictus International Holdings Limited (SGX:BQD) with its market cap of SGD49.20M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Consumer Retailing businesses operating in the environment facing headwinds from current disruption, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into BQD here.
Does BQD generate enough cash through operations?
BQD has built up its total debt levels in the last twelve months, from MYR95.7M to MYR139.1M , which is made up of current and long term debt. With this rise in debt, BQD currently has MYR72.7M remaining in cash and short-term investments for investing into the business. However, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of BQD’s operating efficiency ratios such as ROA here.
Can BQD pay its short-term liabilities?
At the current liabilities level of MYR98.2M liabilities, the company has been able to meet these obligations given the level of current assets of MYR177.8M, with a current ratio of 1.81x. Generally, for consumer retailing companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can BQD service its debt comfortably?
BQD is a relatively highly levered company with a debt-to-equity of 45.56%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since BQD is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, BQD has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may be different. I suggest researching market expectations for BQD’s future growth on our free analysis platform.