While small-cap stocks, such as OKH Global Ltd (SGX:S3N) with its market cap of SGD41.76M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since S3N is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into S3N here.

Does S3N generate an acceptable amount of cash through operations?

S3N has shrunken its total debt levels in the last twelve months, from SGD273.7M to SGD184.9M – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at SGD20.3M for investing into the business. Moreover, S3N has produced SGD26.9M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 14.53%, indicating that S3N’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In S3N’s case, it is able to generate 0.15x cash from its debt capital.

Can S3N pay its short-term liabilities?

With current liabilities at SGD164.8M, it appears that the company has been able to meet these obligations given the level of current assets of SGD173.6M, with a current ratio of 1.05x. Generally, for Construction companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can S3N service its debt comfortably?

With total debt exceeding equities, S3N is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since S3N is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

At its current level of cash flow coverage, S3N has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. I admit this is a fairly basic analysis for S3N’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research OKH Global to get a more holistic view of the stock by looking at: