Investors are always looking for growth in small-cap stocks like Asian Pay Television Trust (SGX:S7OU), with a market cap of S$581.90m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into S7OU here.
How does S7OU’s operating cash flow stack up against its debt?
Over the past year, S7OU has ramped up its debt from S$1.31b to S$1.40b , which comprises of short- and long-term debt. With this rise in debt, S7OU’s cash and short-term investments stands at S$66.84m , ready to deploy into the business. On top of this, S7OU has produced S$188.34m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 13.49%, meaning that S7OU’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In S7OU’s case, it is able to generate 0.13x cash from its debt capital.
Can S7OU pay its short-term liabilities?
At the current liabilities level of S$109.12m liabilities, the company has not been able to meet these commitments with a current assets level of S$79.96m, leading to a 0.73x current account ratio. which is under the appropriate industry ratio of 3x.
Can S7OU service its debt comfortably?With total debt exceeding equities, S7OU is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if S7OU’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 S7OU, the ratio of 2.06x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
S7OU’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how S7OU has been performing in the past. You should continue to research Asian Pay Television Trust to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for S7OU’s future growth? Take a look at our free research report of analyst consensus for S7OU’s outlook.
- Valuation: What is S7OU 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 S7OU 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.