Yahoo Finance Are Lian Beng Group Ltd’s (SGX:L03) Interest Costs Too High?
Lian Beng Group Ltd (SGX:L03) is a small-cap stock with a market capitalization of S$274.83m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into L03 here.
How much cash does L03 generate through its operations?
Over the past year, L03 has ramped up its debt from S$497.10m to S$705.95m , which is made up of current and long term debt. With this growth in debt, L03 currently has S$196.79m remaining in cash and short-term investments , ready to deploy into the business. Additionally, L03 has produced cash from operations of S$46.82m over the same time period, leading to an operating cash to total debt ratio of 6.63%, signalling that L03’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In L03’s case, it is able to generate 0.066x cash from its debt capital.
Does L03’s liquid assets cover its short-term commitments?
At the current liabilities level of S$540.66m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of S$622.90m, with a current ratio of 1.15x. Generally, for Construction companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does L03 face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, L03 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In L03’s case, the ratio of 7.89x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as L03’s high interest coverage is seen as responsible and safe practice.
Next Steps:
At its current level of cash flow coverage, L03 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for L03’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Lian Beng Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for L03’s future growth? Take a look at our free research report of analyst consensus for L03’s outlook.
Historical Performance: What has L03’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 pass 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.
