Raffles United Holdings Ltd (SGX:K22) is a small-cap stock with a market capitalization of S$45.64M. 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? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into K22 here.

Does K22 generate enough cash through operations?

K22 has shrunken its total debt levels in the last twelve months, from S$51.79M to S$36.19M – this includes both the current and long-term debt. With this reduction in debt, K22’s cash and short-term investments stands at S$6.13M for investing into the business. Additionally, K22 has generated S$15.77M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 43.56%, signalling that K22’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 K22’s case, it is able to generate 0.44x cash from its debt capital.

Does K22’s liquid assets cover its short-term commitments?

With current liabilities at S$27.14M, it seems that the business has been able to meet these commitments with a current assets level of S$50.14M, leading to a 1.85x current account ratio. Generally, for Trade Distributors companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Does K22 face the risk of succumbing to its debt-load?

With debt reaching 44.77% of equity, K22 may be thought of as relatively highly levered. 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 K22’s case, the ratio of 3.76x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as K22’s high interest coverage is seen as responsible and safe practice.