Rowsley Ltd (SGX:A50) is a small-cap stock with a market capitalization of SGD611.26M. 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? Since A50 is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into A50 here.
Does A50 generate an acceptable amount of cash through operations?
A50 has sustained its debt level by about SGD117.1M over the last 12 months comprising of short- and long-term debt. At this stable level of debt, A50’s cash and short-term investments stands at SGD37.6M , ready to deploy into the business. Additionally, A50 has generated cash from operations of SGD7.6M in the last twelve months, resulting in an operating cash to total debt ratio of 6.52%, signalling that A50’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In A50’s case, it is able to generate 0.07x cash from its debt capital.
Does A50’s liquid assets cover its short-term commitments?
Looking at A50’s most recent SGD30.3M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 8.3x. However, anything above 3x is considered high and could mean that A50 has too much idle capital in low-earning investments.
Is A50’s debt level acceptable?
With debt at 29.73% of equity, A50 may be thought of as appropriately levered. A50 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with A50, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Although A50’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, 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 A50 has been performing in the past. I suggest you continue to research Rowsley to get a more holistic view of the stock by looking at: