Is Seroja Investments Limited's (SGX:IW5) Balance Sheet Strong Enough To Weather A Storm?

Seroja Investments Limited (SGX:IW5) is a small-cap stock with a market capitalization of SGD15.62M. 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? Since IW5 is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. 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 suggest you dig deeper yourself into IW5 here.

Does IW5 generate enough cash through operations?

Over the past year, IW5 has reduced its debt from $26.4M to $19.1M – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at $6.1M for investing into the business. On top of this, IW5 has produced $10.4M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 54.19%, indicating that IW5’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In IW5’s case, it is able to generate 0.54x cash from its debt capital.

Does IW5’s liquid assets cover its short-term commitments?

Looking at IW5’s most recent $12.8M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of $17.3M, with a current ratio of 1.36x. For Shipping 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 IW5 face the risk of succumbing to its debt-load?

With debt at 24.74% of equity, IW5 may be thought of as appropriately levered. IW5 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. IW5's risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

IW5 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, 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 IW5 has company-specific issues impacting its capital structure decisions. You should continue to research Seroja Investments to get a more holistic view of the stock by looking at:

1. Valuation: What is IW5 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 IW5 is currently mispriced by the market.

2. Historical Performance: What has IW5'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.

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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.