Investors are always looking for growth in small-cap stocks like Continental Seeds and Chemicals Limited (NSEI:CONTI), with a market cap of ₹148.24M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, 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. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into CONTI here.
How does CONTI’s operating cash flow stack up against its debt?
Over the past year, CONTI has ramped up its debt from ₹40.17M to ₹46.34M , which comprises of short- and long-term debt. With this increase in debt, CONTI currently has ₹411.00K remaining in cash and short-term investments for investing into the business. Additionally, CONTI has generated cash from operations of ₹7.84M during the same period of time, leading to an operating cash to total debt ratio of 16.93%, signalling that CONTI’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CONTI’s case, it is able to generate 0.17x cash from its debt capital.
Does CONTI’s liquid assets cover its short-term commitments?
Looking at CONTI’s most recent ₹55.21M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2x. For Food 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 CONTI face the risk of succumbing to its debt-load?
With debt reaching 81.84% of equity, CONTI may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether CONTI 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 CONTI’s, case, the ratio of 2.79x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
CONTI’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, 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 CONTI has been performing in the past. You should continue to research Continental Seeds and Chemicals to get a better picture of the stock by looking at: