Investors are always looking for growth in small-cap stocks like Penguin International Limited (SGX:BTM), with a market cap of SGD70.45M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, 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. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into BTM here.
Does BTM generate enough cash through operations?
Over the past year, BTM has reduced its debt from SGD13.3M to SGD10.0M , which is made up of current and long term debt. With this debt payback, BTM currently has SGD18.9M remaining in cash and short-term investments for investing into the business. Though its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of BTM’s operating efficiency ratios such as ROA here.
Does BTM’s liquid assets cover its short-term commitments?
Looking at BTM’s most recent SGD30.3M liabilities, the company has been able to meet these commitments with a current assets level of SGD77.7M, leading to a 2.57x current account ratio. Generally, for shipping 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.
Is BTM’s level of debt at an acceptable level?
With debt at 2.74% of equity, BTM may be thought of as having low leverage. This range is considered safe as BTM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether BTM is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In BTM’s, case, the ratio of 11.11x suggests that interest is excessively covered, which means that debtors may be willing to loan the company more money, giving BTM ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? BTM’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, its financial position may change. I suggest researching market expectations for BTM’s future growth on our free analysis platform.