While small-cap stocks, such as Country Club Hospitality & Holidays Limited (NSEI:CCHHL) with its market cap of ₹2.47B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into CCHHL here.
Does CCHHL generate an acceptable amount of cash through operations?
CCHHL’s debt level has been constant at around ₹4,517.2M over the previous year made up of current and long term debt. At this stable level of debt, CCHHL currently has ₹117.5M remaining in cash and short-term investments for investing into the business. Additionally, CCHHL has generated ₹833.3M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 18.45%, signalling that CCHHL’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 CCHHL’s case, it is able to generate 0.18x cash from its debt capital.
Does CCHHL’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹1,437.3M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of ₹1,240.5M, with a current ratio of 0.86x below the prudent level of 3x.
Does CCHHL face the risk of succumbing to its debt-load?
CCHHL is a relatively highly levered company with a debt-to-equity of 43.73%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if CCHHL’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 CCHHL, the ratio of 1.31x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, CCHHL has room for improvement to better cushion for events which may require debt repayment. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may change. You should always be researching market expectations for CCHHL’s future growth on our free analysis platform.