Is Sin Heng Heavy Machinery Limited’s (SGX:BKA) Balance Sheet A Threat To Its Future?
While small-cap stocks, such as Sin Heng Heavy Machinery Limited (SGX:BKA) with its market cap of S$40m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into BKA here.
Does BKA produce enough cash relative to debt?
BKA’s debt levels have fallen from S$63m to S$54m over the last 12 months , which is made up of current and long term debt. With this debt repayment, BKA’s cash and short-term investments stands at S$29m for investing into the business. On top of this, BKA has generated S$33m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 61%, indicating that BKA’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BKA’s case, it is able to generate 0.61x cash from its debt capital.
Can BKA meet its short-term obligations with the cash in hand?
Looking at BKA’s most recent S$38m liabilities, it appears that the company has been able to meet these commitments with a current assets level of S$67m, leading to a 1.75x current account ratio. Generally, for Trade Distributors companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is BKA’s debt level acceptable?
BKA is a relatively highly levered company with a debt-to-equity of 44%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether BKA 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 BKA’s, case, the ratio of 3.48x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving BKA ample headroom to grow its debt facilities.
Next Steps:
Although BKA’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure BKA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Sin Heng Heavy Machinery to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for BKA’s future growth? Take a look at our free research report of analyst consensus for BKA’s outlook.
Valuation: What is BKA 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 BKA 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.
