While small-cap stocks, such as Indofood Agri Resources Ltd (SGX:5JS) with its market cap of SGD579.30M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to 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. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into 5JS here.

How does 5JS’s operating cash flow stack up against its debt?

5JS’s debt level has been constant at around IDR10,569,440.0M over the previous year – this includes both the current and long-term debt. At this current level of debt, 5JS’s cash and short-term investments stands at IDR2,404,838.0M for investing into the business. On top of this, 5JS has produced IDR2,068,570.0M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 19.57%, meaning that 5JS’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 5JS’s case, it is able to generate 0.2x cash from its debt capital.

Does 5JS’s liquid assets cover its short-term commitments?

Looking at 5JS’s most recent IDR4,650,308.0M liabilities, it seems that the business has been able to meet these commitments with a current assets level of IDR6,754,405.0M, leading to a 1.45x current account ratio. Generally, for Food companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Does 5JS face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 47.21%, 5JS can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether 5JS 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 5JS’s, case, the ratio of 4.94x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 5JS’s high interest coverage is seen as responsible and safe practice.