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Regal International Group Ltd (SGX:UV1) is a small-cap stock with a market capitalization of S$33.29M. 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? Evaluating financial health as part of your investment thesis is 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. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into UV1 here.
Does UV1 generate enough cash through operations?
UV1 has built up its total debt levels in the last twelve months, from RM51.08M to RM61.96M – this includes both the current and long-term debt. With this growth in debt, UV1 currently has RM15.17M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of UV1’s operating efficiency ratios such as ROA here.
Can UV1 pay its short-term liabilities?
With current liabilities at RM162.56M, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.37x. Usually, for Real Estate 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.
Is UV1’s debt level acceptable?
With total debt exceeding equities, UV1 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In UV1’s case, the ratio of 3.12x suggests that interest is appropriately 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.
Next Steps:
UV1’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure UV1 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Regal International Group to get a better picture of the stock by looking at: