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Investors are always looking for growth in small-cap stocks like Penguin International Limited (SGX:BTM), with a market cap of S$73.76M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis 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, I know these factors are very high-level, so I suggest you dig deeper yourself into BTM here.
Does BTM generate enough cash through operations?
Over the past year, BTM has reduced its debt from S$9.98M to S$3.33M – this includes both the current and long-term debt. With this debt repayment, BTM currently has S$39.08M remaining in cash and short-term investments , ready to deploy into the business. Moreover, BTM has generated S$18.12M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 543.77%, meaning that BTM’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BTM’s case, it is able to generate 5.44x cash from its debt capital.
Can BTM pay its short-term liabilities?
With current liabilities at S$25.19M, it seems that the business has been able to meet these obligations given the level of current assets of S$87.19M, with a current ratio of 3.46x. However, anything about 3x may be excessive, since BTM may be leaving too much capital in low-earning investments.
Can BTM service its debt comfortably?
With debt at 2.35% of equity, BTM may be thought of as having low leverage. This range is considered safe as BTM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if BTM’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 BTM, the ratio of 2.18x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
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BTM’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure BTM has company-specific issues impacting its capital structure decisions. You should continue to research Penguin International to get a better picture of the stock by looking at: