Is Yanlord Land Group Limited's (SGX:Z25) Balance Sheet A Threat To Its Future?

Simply Wall St

Tue, Jun 4, 2019, 9:02 PM

While small-cap stocks, such as Yanlord Land Group Limited (SGX:Z25) with its market cap of S$2.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes essential, as mismanagement of capital can lead to 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. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into Z25 here.

Does Z25 Produce Much Cash Relative To Its Debt?

Z25's debt levels surged from CN¥34b to CN¥44b over the last 12 months , which accounts for long term debt. With this increase in debt, Z25's cash and short-term investments stands at CN¥8.2b to keep the business going. Additionally, Z25 has generated cash from operations of CN¥1.2b in the last twelve months, resulting in an operating cash to total debt ratio of 2.6%, signalling that Z25’s debt is not covered by operating cash.

Can Z25 pay its short-term liabilities?

At the current liabilities level of CN¥40b, the company has been able to meet these obligations given the level of current assets of CN¥56b, with a current ratio of 1.41x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Real Estate 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.

Can Z25 service its debt comfortably?

Since total debt levels exceed equity, Z25 is a highly 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 check to see whether Z25 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In Z25's, case, the ratio of 55.37x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving Z25 ample headroom to grow its debt facilities.

Next Steps:

Although Z25’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. This is only a rough assessment of financial health, and I'm sure Z25 has company-specific issues impacting its capital structure decisions. You should continue to research Yanlord Land Group to get a better picture of the small-cap by looking at: