What Investors Should Know About King Wan Corporation Limited’s (SGX:554) Financial Strength
Investors are always looking for growth in small-cap stocks like King Wan Corporation Limited (SGX:554), with a market cap of S$43m. However, an important fact which most ignore is: how financially healthy is the business? Since 554 is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I recommend you dig deeper yourself into 554 here.
Does 554 produce enough cash relative to debt?
554 has built up its total debt levels in the last twelve months, from S$31m to S$34m , which includes long-term debt. With this increase in debt, 554 currently has S$5.6m remaining in cash and short-term investments for investing into the business. Moreover, 554 has produced cash from operations of S$7.3m in the last twelve months, leading to an operating cash to total debt ratio of 22%, signalling that 554’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In 554’s case, it is able to generate 0.22x cash from its debt capital.
Can 554 meet its short-term obligations with the cash in hand?
With current liabilities at S$51m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.92x.
Is 554’s debt level acceptable?
With debt reaching 50% of equity, 554 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since 554 is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although 554’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how 554 has been performing in the past. You should continue to research King Wan to get a better picture 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.
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.
