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While small-cap stocks, such as Brigade Enterprises Limited (NSE:BRIGADE) with its market cap of ₹34b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to 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. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into BRIGADE here.
Does BRIGADE Produce Much Cash Relative To Its Debt?
BRIGADE's debt level has been constant at around ₹34b over the previous year which accounts for long term debt. At this constant level of debt, BRIGADE's cash and short-term investments stands at ₹2.7b , ready to be used for running the business. Additionally, BRIGADE has generated cash from operations of ₹4.5b in the last twelve months, leading to an operating cash to total debt ratio of 13%, meaning that BRIGADE’s debt is not covered by operating cash.
Can BRIGADE pay its short-term liabilities?
At the current liabilities level of ₹50b, it seems that the business has been able to meet these obligations given the level of current assets of ₹58b, with a current ratio of 1.16x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Real Estate 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.
Can BRIGADE service its debt comfortably?
BRIGADE is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether BRIGADE 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 BRIGADE's, case, the ratio of 2.33x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as BRIGADE’s low interest coverage already puts the company at higher risk of default.
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Although BRIGADE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for BRIGADE's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Brigade Enterprises to get a better picture of the small-cap by looking at: