While small-cap stocks, such as Balrampur Chini Mills Limited (NSEI:BALRAMCHIN) with its market cap of ₹31.11B, 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’d encourage you to dig deeper yourself into BALRAMCHIN here.

Does BALRAMCHIN generate an acceptable amount of cash through operations?

BALRAMCHIN’s debt levels surged from ₹16,676.4M to ₹17,822.8M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹48.8M , ready to deploy into the business. Additionally, BALRAMCHIN has generated ₹3,456.4M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 19.39%, indicating that BALRAMCHIN’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BALRAMCHIN’s case, it is able to generate 0.19x cash from its debt capital.

Can BALRAMCHIN meet its short-term obligations with the cash in hand?

With current liabilities at ₹21,832.8M 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 1.16x. Generally, for food companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is BALRAMCHIN’s level of debt at an acceptable level?

With total debt exceeding equities, BALRAMCHIN is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if BALRAMCHIN’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 BALRAMCHIN, the ratio of 16.69x suggests that interest is excessively covered, which means that lenders may be less hesitant to lend out more funding as BALRAMCHIN’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Are you a shareholder? At its current level of cash flow coverage, BALRAMCHIN has room for improvement to better cushion for events which may require debt repayment. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that BALRAMCHIN’s financial situation may change. I recommend researching market expectations for BALRAMCHIN’s future growth on our free analysis platform.

Are you a potential investor? With a high level of debt on its balance sheet, BALRAMCHIN could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for BALRAMCHIN to increase its operational efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. You should continue your analysis by taking a look at BALRAMCHIN’s past performance analysis on our free platform to figure out BALRAMCHIN’s financial health position.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.