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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Bharat Forge Limited (NSE:BHARATFORG), with a market cap of ₹291.10b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine BHARATFORG’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of Bharat Forge’s financial health, so you should conduct further analysis into BHARATFORG here.
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Does BHARATFORG produce enough cash relative to debt?
BHARATFORG’s debt level has been constant at around ₹32.57b over the previous year made up of current and long term debt. At this constant level of debt, BHARATFORG currently has ₹6.88b remaining in cash and short-term investments for investing into the business. Additionally, BHARATFORG has generated cash from operations of ₹9.67b over the same time period, leading to an operating cash to total debt ratio of 29.7%, indicating that BHARATFORG’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BHARATFORG’s case, it is able to generate 0.3x cash from its debt capital.
Does BHARATFORG’s liquid assets cover its short-term commitments?
Looking at BHARATFORG’s most recent ₹37.54b liabilities, the company has been able to meet these commitments with a current assets level of ₹45.81b, leading to a 1.22x current account ratio. For Auto Components companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does BHARATFORG face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 69.6%, BHARATFORG can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if BHARATFORG’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 BHARATFORG, the ratio of 23.9x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving BHARATFORG ample headroom to grow its debt facilities.