While small-cap stocks, such as D P Abhushan Limited (NSEI:DPABHUSHAN) with its market cap of ₹1.56B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the specialty retail industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into DPABHUSHAN here.
Does DPABHUSHAN generate enough cash through operations?
DPABHUSHAN’s debt level has been constant at around ₹957.1M over the previous year made up of current and long term debt. At this current level of debt, the current cash and short-term investment levels stands at ₹22.7M , ready to deploy into the business. Additionally, DPABHUSHAN has produced ₹84.6M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 8.84%, signalling that DPABHUSHAN’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 DPABHUSHAN’s case, it is able to generate 0.09x cash from its debt capital.
Can DPABHUSHAN pay its short-term liabilities?
Looking at DPABHUSHAN’s most recent ₹510.1M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.29x. Usually, for specialty retail companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is DPABHUSHAN’s level of debt at an acceptable level?
Since total debt levels have outpaced equities, DPABHUSHAN is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether DPABHUSHAN is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In DPABHUSHAN’s, case, the ratio of 1.65x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as DPABHUSHAN’s low interest coverage already puts the company at higher risk of default.