Investors are always looking for growth in small-cap stocks like Felix Industries Limited (NSEI:FELIX), with a market cap of ₹204.23M. However, an important fact which most ignore is: how financially healthy is the business? 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. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into FELIX here.
How does FELIX’s operating cash flow stack up against its debt?
Over the past year, FELIX has reduced its debt from ₹16.7M to ₹11.1M , which comprises of short- and long-term debt. With this debt payback, FELIX currently has ₹1.9M remaining in cash and short-term investments , ready to deploy into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of FELIX’s operating efficiency ratios such as ROA here.
Can FELIX pay its short-term liabilities?
Looking at FELIX’s most recent ₹22.3M liabilities, the company has been able to meet these obligations given the level of current assets of ₹52.7M, with a current ratio of 2.36x. Generally, for water utilities companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is FELIX’s level of debt at an acceptable level?
FELIX’s level of debt is appropriate relative to its total equity, at 28.48%. This range is considered safe as FELIX is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if FELIX’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 FELIX, the ratio of 2.73x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Are you a shareholder? Although FELIX’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. I suggest keeping abreast of market expectations for FELIX’s future growth on our free analysis platform.