While small-cap stocks, such as First Sponsor Group Limited (SGX:ADN) with its market cap of S$946m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to 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 not a comprehensive overview, so I’d encourage you to dig deeper yourself into ADN here.
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ADN’s Debt (And Cash Flows)
ADN’s debt levels surged from S$793m to S$890m over the last 12 months , which includes long-term debt. With this rise in debt, ADN’s cash and short-term investments stands at S$326m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. 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 ADN’s operating efficiency ratios such as ROA here.
Can ADN pay its short-term liabilities?
At the current liabilities level of S$479m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.37x. The current ratio is calculated by dividing current assets by current liabilities. For Real Estate companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can ADN service its debt comfortably?
ADN is a relatively highly levered company with a debt-to-equity of 66%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies.
Although ADN’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. Keep in mind I haven’t considered other factors such as how ADN has been performing in the past. I suggest you continue to research First Sponsor Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ADN’s future growth? Take a look at our free research report of analyst consensus for ADN’s outlook.
- Historical Performance: What has ADN’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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