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Singapore Shipping Corporation Limited (SGX:S19) is a small-cap stock with a market capitalization of S$119m. 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into S19 here.
S19’s Debt (And Cash Flows)
S19 has shrunk its total debt levels in the last twelve months, from US$70m to US$62m , which includes long-term debt. With this debt repayment, S19 currently has US$28m remaining in cash and short-term investments to keep the business going. On top of this, S19 has generated US$24m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 39%, signalling that S19’s operating cash is sufficient to cover its debt.
Does S19’s liquid assets cover its short-term commitments?
Looking at S19’s US$14m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$33m, leading to a 2.4x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Shipping companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does S19 face the risk of succumbing to its debt-load?
S19 is a relatively highly levered company with a debt-to-equity of 67%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if S19’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 S19, the ratio of 7.56x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as S19’s high interest coverage is seen as responsible and safe practice.