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Investors are always looking for growth in small-cap stocks like Tiong Seng Holdings Limited (SGX:BFI), with a market cap of S$133m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, 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 BFI here.
How does BFI’s operating cash flow stack up against its debt?
BFI’s debt levels have fallen from S$126m to S$90m over the last 12 months – this includes both the current and long-term debt. With this debt payback, BFI currently has S$39m remaining in cash and short-term investments for investing into the business. Moreover, BFI has produced S$32m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 36%, meaning that BFI’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 BFI’s case, it is able to generate 0.36x cash from its debt capital.
Does BFI’s liquid assets cover its short-term commitments?
With current liabilities at S$343m, it seems that the business has been able to meet these commitments with a current assets level of S$505m, leading to a 1.47x current account ratio. Usually, for Construction companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can BFI service its debt comfortably?
BFI’s level of debt is appropriate relative to its total equity, at 29%. BFI is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if BFI’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 BFI, the ratio of 64.25x 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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BFI’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how BFI has been performing in the past. I recommend you continue to research Tiong Seng Holdings to get a better picture of the stock by looking at: