Are APAC Realty Limited’s (SGX:CLN) Interest Costs Too High?

Investors are always looking for growth in small-cap stocks like APAC Realty Limited (SGX:CLN), with a market cap of S$215m. 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. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into CLN here.

Does CLN Produce Much Cash Relative To Its Debt?

CLN has increased its debt level by about S$58m over the last 12 months – which includes long-term debt. With this growth in debt, CLN currently has S$43m remaining in cash and short-term investments to keep the business going. Moreover, CLN has produced S$14m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 24%, signalling that CLN’s operating cash is sufficient to cover its debt.

Can CLN meet its short-term obligations with the cash in hand?

At the current liabilities level of S$81m, the company has been able to meet these obligations given the level of current assets of S$109m, with a current ratio of 1.35x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Real Estate companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

SGX:CLN Historical Debt, April 8th 2019
SGX:CLN Historical Debt, April 8th 2019

Can CLN service its debt comfortably?

With a debt-to-equity ratio of 40%, CLN can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if CLN’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 CLN, the ratio of 190x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving CLN ample headroom to grow its debt facilities.

Next Steps:

CLN’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 CLN has been performing in the past. You should continue to research APAC Realty to get a more holistic view of the small-cap by looking at:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.