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While small-cap stocks, such as Food Empire Holdings Limited (SGX:F03) with its market cap of S$299m, 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 vital, 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. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into F03 here.
Does F03 produce enough cash relative to debt?
Over the past year, F03 has reduced its debt from US$41m to US$34m – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$42m for investing into the business. Additionally, F03 has produced cash from operations of US$25m in the last twelve months, leading to an operating cash to total debt ratio of 76%, meaning that F03’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 F03’s case, it is able to generate 0.76x cash from its debt capital.
Does F03’s liquid assets cover its short-term commitments?
At the current liabilities level of US$68m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$146m, with a current ratio of 2.16x. Generally, for Food companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does F03 face the risk of succumbing to its debt-load?
With debt at 20% of equity, F03 may be thought of as appropriately levered. F03 is not taking on too much debt commitment, which may be constraining for future growth. We can test if F03’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 F03, the ratio of 45.71x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving F03 ample headroom to grow its debt facilities.
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F03 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how F03 has been performing in the past. I suggest you continue to research Food Empire Holdings to get a more holistic view of the stock by looking at: