Investors are always looking for growth in small-cap stocks like Low Keng Huat (Singapore) Limited (SGX:F1E), with a market cap of S$403m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into F1E here.
Does F1E Produce Much Cash Relative To Its Debt?
F1E’s debt level has been constant at around S$447m over the previous year – this includes long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at S$127m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of F1E’s operating efficiency ratios such as ROA here.
Can F1E meet its short-term obligations with the cash in hand?
Looking at F1E’s S$135m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.41x. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is F1E’s debt level acceptable?
With a debt-to-equity ratio of 65%, F1E can be considered as an above-average 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 test if F1E’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 F1E, the ratio of 3.93x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving F1E ample headroom to grow its debt facilities.
Next Steps:
Although F1E’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 F1E has company-specific issues impacting its capital structure decisions. I suggest you continue to research Low Keng Huat (Singapore) to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for F1E’s future growth? Take a look at our free research report of analyst consensus for F1E’s outlook.
- Historical Performance: What has F1E’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.
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