While small-cap stocks, such as Thomson Medical Group Limited (SGX:A50) with its market cap of S$2.0b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into A50 here.
Does A50 Produce Much Cash Relative To Its Debt?
A50's debt levels surged from S$221m to S$578m over the last 12 months , which accounts for long term debt. With this increase in debt, A50 currently has S$117m remaining in cash and short-term investments , ready to be used for running the business. On top of this, A50 has generated cash from operations of S$41m over the same time period, resulting in an operating cash to total debt ratio of 7.0%, meaning that A50’s operating cash is less than its debt.
Can A50 meet its short-term obligations with the cash in hand?
Looking at A50’s S$356m in current liabilities, the company has been able to meet these obligations given the level of current assets of S$504m, with a current ratio of 1.41x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Healthcare companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is A50’s debt level acceptable?
With a debt-to-equity ratio of 74%, A50 can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether A50 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 A50's, case, the ratio of 2.41x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
A50’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. Since there is also no concerns around A50's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how A50 has been performing in the past. I suggest you continue to research Thomson Medical Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for A50’s future growth? Take a look at our free research report of analyst consensus for A50’s outlook.
- Valuation: What is A50 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 A50 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.
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