How Financially Strong Is CEI Limited (SGX:AVV)?

CEI Limited (SGX:AVV) is a small-cap stock with a market capitalization of S$78m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Electronic industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company's financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into AVV here.

Does AVV produce enough cash relative to debt?

Over the past year, AVV has ramped up its debt from S$2m to S$5m made up of predominantly near term debt. With this increase in debt, the current cash and short-term investment levels stands at S$4m for investing into the business. Moreover, AVV has produced S$796k in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 16%, indicating that AVV’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AVV’s case, it is able to generate 0.16x cash from its debt capital.

Can AVV pay its short-term liabilities?

At the current liabilities level of S$32m liabilities, it appears that the company has been able to meet these commitments with a current assets level of S$65m, leading to a 1.99x current account ratio. Usually, for Electronic companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can AVV service its debt comfortably?

With a debt-to-equity ratio of 13%, AVV's debt level may be seen as prudent. AVV is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if AVV’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 AVV, the ratio of 188x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as AVV’s high interest coverage is seen as responsible and safe practice.

Next Steps:

AVV’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for AVV's financial health. Other important fundamentals need to be considered alongside. You should continue to research CEI to get a better picture of the stock by looking at:

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