Can BreadTalk Group Limited Hold Up In A Recession?

Singapore is no stranger to recessions. As such, a recession scenario can be something to think about before we invest.

Like much of the world, the Lion City’s economy suffered during the Global Financial Crisis of 2008-2009. In the third-quarter last year, Singapore had narrowly missed entering a technical recession. If history is a guide, it’s almost a certainty that there will be harder times for Singapore’s economy at some point in the future.

When that happens, we want to be sure that the companies we invest in can survive or even thrive.

Measuring the strength of the balance sheet

“We never want to count on the kindness of strangers in order to meet tomorrow’s obligations.”

– Warren Buffett

Having a strong balance sheet can be of great help to companies in meeting the demands of recessionary episodes. We can get a quick idea of a company’s balance sheet strength using two simple ratios.

Let’s run food and beverage company BreadTalk Group Limited (SGX: 5DA), through the two ratios today. We will be using the company’s figures for the quarter ended 30 September 2015.

The first is called the current ratio. A measure of just how much liquidity a company has, this number is simply a company’s current assets divided by its current liabilities.

BreadTalk’s Current Assets S$169 million
BreadTalk’s Current Liabilities S$259 million
Current Ratio 1.68

Source: BreadTalk’s earnings report

In general, we prefer to see a current ratio of more than 1.5 – BreadTalk’s current ratio of 0.65 does not meet the mark here. Part of the reason is the presence of $81 million in short-term borrowings on BreadTalk’s balance sheet as of 30 September 2015; the company has a total ofS$210 million in debt.

Let’s now look at the second ratio: the quick ratio.

It is similar to the current ratio, but it takes the company’s inventory out of the equation. This is because inventories may not always be worth the amount that are recorded in the books. By removing inventory from the picture, you can find out if a company really has sufficient liquid assets to meet short-term operating needs.

BreadTalk’s Current Assets S$169 million
BreadTalk’s Current Liabilities S$259 million
BreadTalk’s Inventory S$10 million
Quick Ratio 0.61

Source: BreadTalk’s earnings report

We prefer to see a quick ratio that is above 1 and as expected, BreadTalk’s quick ratio of 0.61 falls short.

But this does not necessarily mean that BreadTalk’s balance sheet is weak. The food and beverage company maintains a high level of account payables that are part of its current liabilities. That is to say that BreadTalk is slow to pay its suppliers after receiving delivery. This enables it to maintain a negative cash conversion cycle.

While the negative cash conversion cycle is a positive for the company, we might want to keep an eye on how BreadTalk manages its overall borrowings.

Foolish summary

The two ratios above give you a hint on how BreadTalk is able to finance its current obligations when they become due.

They represent useful starting points, but further study is required to understand whether the company’s business is really able to sustain itself when a recession comes knocking on the door.

(Learn how to calculate the current ratio and quick ratio here.)

For more stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

Like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.