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Is Tat Seng Packaging Group Ltd’s (SGX:T12) Balance Sheet Strong Enough To Weather A Storm?

Autumn Haas

Tat Seng Packaging Group Ltd (SGX:T12) is a small-cap stock with a market capitalization of S$111.61m. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into T12 here.

How much cash does T12 generate through its operations?

T12’s debt levels surged from S$37.14m to S$61.45m over the last 12 months – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at S$40.58m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of T12’s operating efficiency ratios such as ROA here.

Can T12 pay its short-term liabilities?

With current liabilities at S$140.40m, it appears that the company has been able to meet these obligations given the level of current assets of S$199.01m, with a current ratio of 1.42x. For Packaging companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

SGX:T12 Historical Debt June 27th 18

Is T12’s debt level acceptable?

With a debt-to-equity ratio of 48.78%, T12 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if T12’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For T12, the ratio of 36.07x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as T12’s high interest coverage is seen as responsible and safe practice.

Next Steps:

T12’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how T12 has been performing in the past. I suggest you continue to research Tat Seng Packaging Group to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for T12’s future growth? Take a look at our free research report of analyst consensus for T12’s outlook.
  2. Historical Performance: What has T12’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.
  3. 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.