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Investors are always looking for growth in small-cap stocks like Tai Sin Electric Limited (SGX:500), with a market cap of S$169.85M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into 500 here.
Does 500 generate enough cash through operations?
500 has shrunken its total debt levels in the last twelve months, from S$37.19M to S$10.13M made up of predominantly near term debt. With this reduction in debt, the current cash and short-term investment levels stands at S$22.08M for investing into the business. Additionally, 500 has produced cash from operations of S$37.42M over the same time period, resulting in an operating cash to total debt ratio of 369.42%, signalling that 500’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 500’s case, it is able to generate 3.69x cash from its debt capital.
Can 500 pay its short-term liabilities?
With current liabilities at S$44.02M, it seems that the business has been able to meet these commitments with a current assets level of S$168.95M, leading to a 3.84x current account ratio. However, anything about 3x may be excessive, since 500 may be leaving too much capital in low-earning investments.
Can 500 service its debt comfortably?
With debt at 8.80% of equity, 500 may be thought of as having low leverage. 500 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 500 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 500’s, case, the ratio of 43.52x 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.
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500 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 500 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Tai Sin Electric to get a more holistic view of the stock by looking at: