While small-cap stocks, such as Prakash Constrowell Limited (NSE:PRAKASHCON) with its market cap of ₹566m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is 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. However, this commentary is still very high-level, so I suggest you dig deeper yourself into PRAKASHCON here.
How much cash does PRAKASHCON generate through its operations?
PRAKASHCON’s debt level has been constant at around ₹377m over the previous year made up of current and long term debt. At this constant level of debt, PRAKASHCON’s cash and short-term investments stands at ₹37m for investing into the business. Moreover, PRAKASHCON has produced ₹47m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 12%, meaning that PRAKASHCON’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 PRAKASHCON’s case, it is able to generate 0.12x cash from its debt capital.
Does PRAKASHCON’s liquid assets cover its short-term commitments?
With current liabilities at ₹956m, it appears that the company has been able to meet these commitments with a current assets level of ₹1.9b, leading to a 1.96x current account ratio. For Construction 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 PRAKASHCON face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 30%, PRAKASHCON’s debt level may be seen as prudent. PRAKASHCON is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether PRAKASHCON 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 PRAKASHCON’s, case, the ratio of 3.89x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as PRAKASHCON’s high interest coverage is seen as responsible and safe practice.