Stocks with market capitalization between $2B and $10B, such as Singapore Technologies Engineering Ltd (SGX:S63) with a size of SGD10.34B, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine S63’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into S63 here. Check out our latest analysis for Singapore Technologies Engineering

Does S63 generate enough cash through operations?

Over the past year, S63 has reduced its debt from SGD1,193.2M to SGD1,080.3M , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at SGD1,092.5M , ready to deploy into the business. Additionally, S63 has produced SGD758.8M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 70.24%, indicating that S63’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 S63’s case, it is able to generate 0.7x cash from its debt capital.

Can S63 pay its short-term liabilities?

At the current liabilities level of SGD3,801.0M liabilities, the company has been able to meet these obligations given the level of current assets of SGD4,812.9M, with a current ratio of 1.27x. Generally, for Aerospace & Defense companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Is S63’s debt level acceptable?

With debt reaching 47.46% of equity, S63 may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if S63’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 S63, the ratio of 33.37x suggests that interest is comfortably 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.

Next Steps:

S63’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around S63’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for S63’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Singapore Technologies Engineering to get a more holistic view of the mid-cap by looking at: