Investors are always looking for growth in small-cap stocks like Global Invacom Group Limited (SGX:QS9), with a market cap of US$26.35m. However, an important fact which most ignore is: how financially healthy is the business? Communications companies, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into QS9 here.
How much cash does QS9 generate through its operations?
Over the past year, QS9 has ramped up its debt from US$6.30m to US$9.44m , which is mainly comprised of near term debt. With this rise in debt, the current cash and short-term investment levels stands at US$12.51m for investing into the business. Moreover, QS9 has generated cash from operations of US$3.61m in the last twelve months, leading to an operating cash to total debt ratio of 38.22%, meaning that QS9’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In QS9’s case, it is able to generate 0.38x cash from its debt capital.
Can QS9 pay its short-term liabilities?
At the current liabilities level of US$27.03m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$59.93m, with a current ratio of 2.22x. Usually, for Communications 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.
Can QS9 service its debt comfortably?QS9’s level of debt is appropriate relative to its total equity, at 16.88%. QS9 is not taking on too much debt commitment, which may be constraining for future growth. We can test if QS9’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 QS9, the ratio of 6.04x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving QS9 ample headroom to grow its debt facilities.
QS9 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, 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 QS9 has company-specific issues impacting its capital structure decisions. You should continue to research Global Invacom Group to get a better picture of the stock by looking at:
- Valuation: What is QS9 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether QS9 is currently mispriced by the market.
- Historical Performance: What has QS9’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.