What Investors Should Know About Sheng Siong Group Ltd’s (SGX:OV8) Financial Strength
The direct benefit for Sheng Siong Group Ltd (SGX:OV8), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is OV8 will have to adhere to stricter debt covenants and have less financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess OV8’s financial health.
View our latest analysis for Sheng Siong Group
Is financial flexibility worth the lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either OV8 does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. A single-digit revenue growth of 4.2% for OV8 is considerably low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can OV8 meet its short-term obligations with the cash in hand?
Since Sheng Siong Group doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of S$122m liabilities, the company has been able to meet these commitments with a current assets level of S$146m, leading to a 1.2x current account ratio. For Consumer Retailing companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Next Steps:
Having no debt on the books means OV8 has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around OV8’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure OV8 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Sheng Siong Group to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for OV8’s future growth? Take a look at our free research report of analyst consensus for OV8’s outlook.
Valuation: What is OV8 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 OV8 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.
