In This Article:
While small-cap stocks, such as YHI International Limited (SGX:BPF) with its market cap of S$123m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, 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. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into BPF here.
Does BPF produce enough cash relative to debt?
BPF’s debt level has been constant at around S$93m over the previous year which accounts for long term debt. At this constant level of debt, BPF’s cash and short-term investments stands at S$53m , ready to deploy into the business. On top of this, BPF has produced cash from operations of S$12m over the same time period, leading to an operating cash to total debt ratio of 13%, meaning that BPF’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BPF’s case, it is able to generate 0.13x cash from its debt capital.
Can BPF meet its short-term obligations with the cash in hand?
With current liabilities at S$123m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.24x. Usually, for Retail Distributors companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can BPF service its debt comfortably?
With a debt-to-equity ratio of 35%, BPF’s debt level may be seen as prudent. BPF is not taking on too much debt commitment, which may be constraining for future growth. We can test if BPF’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 BPF, the ratio of 4.21x 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:
BPF’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for BPF’s financial health. Other important fundamentals need to be considered alongside. You should continue to research YHI International to get a better picture of the stock by looking at: