Prabhat Dairy Limited (NSEI:PRABHAT) is a small-cap stock with a market capitalization of ₹22.01B. 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? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into PRABHAT here.
Does PRABHAT generate an acceptable amount of cash through operations?
Over the past year, PRABHAT has ramped up its debt from ₹1,581.6M to ₹3,583.0M , which is made up of current and long term debt. With this increase in debt, PRABHAT currently has ₹1,655.8M remaining in cash and short-term investments , ready to deploy into the business. On top of this, PRABHAT has produced ₹199.6M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 5.57%, meaning that PRABHAT’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PRABHAT’s case, it is able to generate 0.06x cash from its debt capital.
Does PRABHAT’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹4,044.9M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.66x. For food companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does PRABHAT face the risk of succumbing to its debt-load?
PRABHAT’s level of debt is appropriate relative to its total equity, at 38.82%. This range is considered safe as PRABHAT is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if PRABHAT’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 PRABHAT, the ratio of 3.05x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving PRABHAT ample headroom to grow its debt facilities.