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Pacific Basin Shipping Limited (HKG:2343) is a small-cap stock with a market capitalization of HK$7.6b. 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? 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. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into 2343 here.
Does 2343 Produce Much Cash Relative To Its Debt?
Over the past year, 2343 has ramped up its debt from US$881m to US$962m – this includes long-term debt. With this growth in debt, 2343 currently has US$342m remaining in cash and short-term investments to keep the business going. Moreover, 2343 has produced cash from operations of US$190m over the same time period, resulting in an operating cash to total debt ratio of 20%, signalling that 2343’s current level of operating cash is not high enough to cover debt.
Does 2343’s liquid assets cover its short-term commitments?
Looking at 2343’s US$382m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$523m, with a current ratio of 1.37x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Shipping companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 2343 service its debt comfortably?
With a debt-to-equity ratio of 78%, 2343 can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if 2343’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 2343, the ratio of 2.43x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 2343’s low interest coverage already puts the company at higher risk of default.
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Although 2343’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 2343's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Pacific Basin Shipping to get a better picture of the small-cap by looking at: