JB Foods Limited (SGX:BEW) is a small-cap stock with a market capitalization of S$130.75M. 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? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into BEW here.

Does BEW generate enough cash through operations?

BEW’s debt levels have fallen from US$101.70M to US$78.46M over the last 12 months – this includes both the current and long-term debt. With this debt repayment, BEW currently has US$15.64M remaining in cash and short-term investments for investing into the business. Moreover, BEW has generated cash from operations of US$42.46M over the same time period, leading to an operating cash to total debt ratio of 54.11%, signalling that BEW’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BEW’s case, it is able to generate 0.54x cash from its debt capital.

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

With current liabilities at US$110.74M, it seems that the business has been able to meet these commitments with a current assets level of US$134.47M, leading to a 1.21x current account ratio. Generally, for Food companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can BEW service its debt comfortably?

BEW is a relatively highly levered company with a debt-to-equity of 93.26%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In BEW’s case, the ratio of 8.83x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.