While small-cap stocks, such as CASA Holdings Limited (SGX:C04) with its market cap of S$15.74m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that C04 is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into C04 here.
Does C04 produce enough cash relative to debt?
C04’s debt levels surged from S$33.94m to S$37.21m over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, C04’s cash and short-term investments stands at S$12.24m for investing into the business. Additionally, C04 has generated S$3.98m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 10.70%, meaning that C04’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In C04’s case, it is able to generate 0.11x cash from its debt capital.
Can C04 meet its short-term obligations with the cash in hand?
With current liabilities at S$31.92m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.44x. For Retail Distributors companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does C04 face the risk of succumbing to its debt-load?
C04 is a relatively highly levered company with a debt-to-equity of 57.57%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since C04 is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.Next Steps:
At its current level of cash flow coverage, C04 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for C04’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research CASA Holdings to get a more holistic view of the stock by looking at:
- Historical Performance: What has C04’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.
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.