Investors are always looking for growth in small-cap stocks like Chambal Fertilisers and Chemicals Limited (NSEI:CHAMBLFERT), with a market cap of ₹61.01B. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into CHAMBLFERT here.
Does CHAMBLFERT generate enough cash through operations?
CHAMBLFERT has shrunken its total debt levels in the last twelve months, from ₹53,171.3M to ₹46,185.9M , which comprises of short- and long-term debt. With this reduction in debt, CHAMBLFERT currently has ₹1,321.4M remaining in cash and short-term investments , ready to deploy into the business. Additionally, CHAMBLFERT has generated ₹12,795.0M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 27.70%, signalling that CHAMBLFERT’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CHAMBLFERT’s case, it is able to generate 0.28x cash from its debt capital.
Can CHAMBLFERT pay its short-term liabilities?
At the current liabilities level of ₹43,912.1M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹48,698.7M, with a current ratio of 1.11x. Generally, for chemicals 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 CHAMBLFERT service its debt comfortably?
CHAMBLFERT is a highly-leveraged company with debt exceeding equity by over 100%. 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 CHAMBLFERT’s case, the ratio of 5.42x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CHAMBLFERT’s high interest coverage is seen as responsible and safe practice.