Golden Agri-Resources Ltd (SGX:E5H) is a small-cap stock with a market capitalization of S$3.5b. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into E5H here.
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Does E5H Produce Much Cash Relative To Its Debt?
E5H has sustained its debt level by about US$3.0b over the last 12 months – this includes long-term debt. At this constant level of debt, E5H's cash and short-term investments stands at US$562m to keep the business going. Additionally, E5H has produced cash from operations of US$486m over the same time period, resulting in an operating cash to total debt ratio of 16%, indicating that E5H’s debt is not covered by operating cash.
Can E5H pay its short-term liabilities?
At the current liabilities level of US$2.7b, the company has been able to meet these commitments with a current assets level of US$2.8b, leading to a 1.03x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Food companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is E5H’s debt level acceptable?
E5H is a relatively highly levered company with a debt-to-equity of 70%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether E5H is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In E5H's, case, the ratio of 1.05x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
E5H’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for E5H's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Golden Agri-Resources to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for E5H’s future growth? Take a look at our free research report of analyst consensus for E5H’s outlook.
- Valuation: What is E5H 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 E5H is currently mispriced by the market.
- 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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