Is G K Goh Holdings Limited's (SGX:G41) Balance Sheet A Threat To Its Future?

By
Simply Wall St
Published
June 27, 2018
SGX:G41

Investors are always looking for growth in small-cap stocks like G K Goh Holdings Limited (SGX:G41), with a market cap of S$334.62m. 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, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into G41 here.

Does G41 produce enough cash relative to debt?

G41 has shrunken its total debt levels in the last twelve months, from S$195.02m to S$165.82m – this includes both the current and long-term debt. With this reduction in debt, G41's cash and short-term investments stands at S$73.48m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of G41’s operating efficiency ratios such as ROA here.

Can G41 pay its short-term liabilities?

Looking at G41’s most recent S$118.77m liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.83x, which is below the prudent industry ratio of 3x.

SGX:G41 Historical Debt June 27th 18
SGX:G41 Historical Debt June 27th 18

Is G41’s debt level acceptable?

With debt at 28.27% of equity, G41 may be thought of as appropriately levered. This range is considered safe as G41 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether G41 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 G41's, case, the ratio of 1.75x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as G41’s low interest coverage already puts the company at higher risk of default.

Next Steps:

G41’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how G41 has been performing in the past. I recommend you continue to research G. K. Goh Holdings to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for G41’s future growth? Take a look at our free research report of analyst consensus for G41’s outlook.
  2. Valuation: What is G41 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 G41 is currently mispriced by the market.
  3. 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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