While small-cap stocks, such as Southern Packaging Group Limited (SGX:BQP) with its market cap of S$22m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since BQP is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into BQP here.
Does BQP Produce Much Cash Relative To Its Debt?
BQP has sustained its debt level by about CN¥280m over the last 12 months which accounts for long term debt. At this current level of debt, BQP currently has CN¥66m remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of BQP’s operating efficiency ratios such as ROA here.
Can BQP meet its short-term obligations with the cash in hand?
Looking at BQP’s CN¥403m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CN¥419m, with a current ratio of 1.04x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Packaging companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is BQP’s debt level acceptable?
With debt reaching 51% of equity, BQP 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. Though, since BQP is currently unprofitable, 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.
BQP’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. Keep in mind I haven't considered other factors such as how BQP has been performing in the past. I suggest you continue to research Southern Packaging Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BQP’s future growth? Take a look at our free research report of analyst consensus for BQP’s outlook.
- Historical Performance: What has BQP'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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