Is First Sponsor Group Limited’s (SGX:ADN) Balance Sheet A Threat To Its Future?

While small-cap stocks, such as First Sponsor Group Limited (SGX:ADN) with its market cap of S$824m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes 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. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ADN here.

How does ADN’s operating cash flow stack up against its debt?

ADN has built up its total debt levels in the last twelve months, from S$514m to S$687m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at S$291m for investing 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 take a look at some of ADN’s operating efficiency ratios such as ROA here.

Can ADN pay its short-term liabilities?

With current liabilities at S$459m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.55x. 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.

SGX:ADN Historical Debt January 21st 19
SGX:ADN Historical Debt January 21st 19

Is ADN’s debt level acceptable?

With debt reaching 54% of equity, ADN may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.

Next Steps:

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. Since there is also no concerns around ADN’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ADN’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research First Sponsor Group to get a more holistic view of the small-cap by looking at:

  1. 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.
  2. Valuation: What is ADN 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 ADN 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.