What Investors Should Know About Avarga Limited’s (SGX:U09) Financial Strength
Investors are always looking for growth in small-cap stocks like Avarga Limited (SGX:U09), with a market cap of S$185m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into U09 here.
Does U09 produce enough cash relative to debt?
U09 has shrunken its total debt levels in the last twelve months, from S$225m to S$191m , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at S$18m for investing into the business. Additionally, U09 has generated cash from operations of S$49m during the same period of time, resulting in an operating cash to total debt ratio of 26%, signalling that U09’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In U09’s case, it is able to generate 0.26x cash from its debt capital.
Does U09’s liquid assets cover its short-term commitments?
With current liabilities at S$227m, it appears that the company has been able to meet these obligations given the level of current assets of S$373m, with a current ratio of 1.64x. For Forestry companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can U09 service its debt comfortably?
With debt reaching 70% of equity, U09 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In U09’s case, the ratio of 5.33x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as U09’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although U09’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around U09’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for U09’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Avarga to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for U09’s future growth? Take a look at our free research report of analyst consensus for U09’s outlook.
Valuation: What is U09 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 U09 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.
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.
