What does Ossia International Limited's (SGX:O08) Balance Sheet Tell Us About Its Future?

While small-cap stocks, such as Ossia International Limited (SGX:O08) with its market cap of S$22.23m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, 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, this commentary is still very high-level, so I recommend you dig deeper yourself into O08 here.

How does O08’s operating cash flow stack up against its debt?

O08's debt levels have fallen from S$6.52m to S$5.87m over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, O08's cash and short-term investments stands at S$5.18m , ready to deploy into the business. On top of this, O08 has generated cash from operations of S$2.03m during the same period of time, resulting in an operating cash to total debt ratio of 34.54%, signalling that O08’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In O08’s case, it is able to generate 0.35x cash from its debt capital.

Does O08’s liquid assets cover its short-term commitments?

Looking at O08’s most recent S$8.62m liabilities, it appears that the company has been able to meet these commitments with a current assets level of S$22.02m, leading to a 2.55x current account ratio. Usually, for Retail Distributors companies, this is a suitable ratio as there's enough of a cash buffer without holding too capital in low return investments.

Does O08 face the risk of succumbing to its debt-load?

O08’s level of debt is appropriate relative to its total equity, at 15.18%. O08 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if O08’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 O08, the ratio of 11.17x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving O08 ample headroom to grow its debt facilities.

Next Steps:

O08’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure O08 has company-specific issues impacting its capital structure decisions. You should continue to research Ossia International to get a better picture of the stock by looking at:

1. Valuation: What is O08 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 O08 is currently mispriced by the market.
2. Historical Performance: What has O08'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.
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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.