Chromatic India Limited (NSEI:CHROMATIC) is a small-cap stock with a market capitalization of ₹228.77M. 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into CHROMATIC here.
Does CHROMATIC generate an acceptable amount of cash through operations?
CHROMATIC’s debt levels have fallen from ₹57.3M to ₹40.8M over the last 12 months , which is made up of current and long term debt. With this debt repayment, CHROMATIC’s cash and short-term investments stands at ₹18.7M , ready to deploy into the business. On top of this, CHROMATIC has generated cash from operations of ₹13.1M during the same period of time, resulting in an operating cash to total debt ratio of 32.06%, indicating that CHROMATIC’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CHROMATIC’s case, it is able to generate 0.32x cash from its debt capital.
Can CHROMATIC meet its short-term obligations with the cash in hand?
Looking at CHROMATIC’s most recent ₹747.7M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 1x, which is below the prudent industry ratio of 3x.
Does CHROMATIC face the risk of succumbing to its debt-load?
CHROMATIC’s level of debt is low relative to its total equity, at 1.16%. This range is considered safe as CHROMATIC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether CHROMATIC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In CHROMATIC’s, case, the ratio of 0.44x 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? CHROMATIC has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially when liquidity may also be an issue. I suggest you take a look at CHROMATIC’s future growth analysis on our free platform. to properly assess what the market expects for the company moving forward.