While small-cap stocks, such as Chasen Holdings Limited (SGX:5NV) with its market cap of S$26.43m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, 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 5NV here.
Does 5NV produce enough cash relative to debt?
5NV’s debt levels surged from S$33.64m to S$35.37m over the last 12 months , which is made up of current and long term debt. With this increase in debt, 5NV currently has S$10.82m remaining in cash and short-term investments , ready to deploy into the business. Additionally, 5NV has produced S$9.29m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 26.25%, signalling that 5NV’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 5NV’s case, it is able to generate 0.26x cash from its debt capital.
Can 5NV pay its short-term liabilities?
At the current liabilities level of S$50.23m liabilities, the company has been able to meet these obligations given the level of current assets of S$74.37m, with a current ratio of 1.48x. Generally, for Commercial Services companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 5NV’s debt level acceptable?5NV is a relatively highly levered company with a debt-to-equity of 47.84%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 5NV 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 5NV’s, case, the ratio of 5.15x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 5NV’s high interest coverage is seen as responsible and safe practice.
5NV’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 5NV’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how 5NV has been performing in the past. You should continue to research Chasen Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 5NV’s future growth? Take a look at our free research report of analyst consensus for 5NV’s outlook.
- Valuation: What is 5NV 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 5NV is currently mispriced by the market.
- 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.