Powerful Technologies Limited (NSE:POWERFUL) is a small-cap stock with a market capitalization of ₹179m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is crucial, since poor capital management may bring about 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. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into POWERFUL here.
POWERFUL’s Debt (And Cash Flows)
Over the past year, POWERFUL has ramped up its debt from ₹61m to ₹68m , which includes long-term debt. With this growth in debt, POWERFUL's cash and short-term investments stands at ₹244k to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of POWERFUL’s operating efficiency ratios such as ROA here.
Can POWERFUL meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹184m, it appears that the company has been able to meet these obligations given the level of current assets of ₹304m, with a current ratio of 1.66x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Consumer Durables companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can POWERFUL service its debt comfortably?
With a debt-to-equity ratio of 54%, POWERFUL can be considered as an above-average leveraged company. 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 test if POWERFUL’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 POWERFUL, the ratio of 8.39x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as POWERFUL’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although POWERFUL’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 POWERFUL's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Powerful Technologies to get a better picture of the small-cap by looking at: