What Does King Wan Corporation Limited's (SGX:554) Balance Sheet Tell Us About It?
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While small-cap stocks, such as King Wan Corporation Limited (SGX:554) with its market cap of S$37m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 554 here.
554’s Debt (And Cash Flows)
554's debt levels have fallen from S$39m to S$36m over the last 12 months , which includes long-term debt. With this debt payback, 554's cash and short-term investments stands at S$5.3m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can examine some of 554’s operating efficiency ratios such as ROA here.
Can 554 pay its short-term liabilities?
With current liabilities at S$51m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.88x. The current ratio is calculated by dividing current assets by current liabilities.
Is 554’s debt level acceptable?
With debt reaching 52% of equity, 554 may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 554's case, the ratio of 9.97x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 554’s high interest coverage is seen as responsible and safe practice.
Next Steps:
554’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure 554 has company-specific issues impacting its capital structure decisions. I recommend you continue to research King Wan to get a more holistic view of the stock by looking at:
Historical Performance: What has 554'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.
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