While small-cap stocks, such as First Resources Limited (SGX:EB5) with its market cap of S$2.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into EB5 here.
How does EB5’s operating cash flow stack up against its debt?
EB5 has shrunken its total debt levels in the last twelve months, from US$496m to US$381m , which also accounts for long term debt. With this debt payback, EB5’s cash and short-term investments stands at US$55m , ready to deploy into the business. Moreover, EB5 has generated US$112m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 30%, meaning that EB5’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 EB5’s case, it is able to generate 0.3x cash from its debt capital.
Does EB5’s liquid assets cover its short-term commitments?
At the current liabilities level of US$115m, it appears that the company has been able to meet these obligations given the level of current assets of US$330m, with a current ratio of 2.87x. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can EB5 service its debt comfortably?
EB5’s level of debt is appropriate relative to its total equity, at 39%. This range is considered safe as EB5 is not taking on too much debt obligation, which may be constraining for future growth. We can test if EB5’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 EB5, the ratio of 10.98x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving EB5 ample headroom to grow its debt facilities.
EB5’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for EB5’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research First Resources to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EB5’s future growth? Take a look at our free research report of analyst consensus for EB5’s outlook.
- Valuation: What is EB5 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 EB5 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.
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