REI Agro Limited (NSEI:REIAGROLTD) is a small-cap stock with a market capitalization of ₹229.92M. 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? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into REIAGROLTD here.
How does REIAGROLTD’s operating cash flow stack up against its debt?
REIAGROLTD has built up its total debt levels in the last twelve months, from ₹57,819.8M to ₹63,913.0M , which is made up of current and long term debt. With this growth in debt, REIAGROLTD currently has ₹3,696.9M remaining in cash and short-term investments , ready to deploy into the business. On top of this, REIAGROLTD has produced cash from operations of ₹7,191.5M over the same time period, leading to an operating cash to total debt ratio of 11.25%, meaning that REIAGROLTD’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 REIAGROLTD’s case, it is able to generate 0.11x cash from its debt capital.
Does REIAGROLTD’s liquid assets cover its short-term commitments?
Looking at REIAGROLTD’s most recent ₹74,714.3M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. For Food companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can REIAGROLTD service its debt comfortably?
Since total debt levels have outpaced equities, REIAGROLTD is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In REIAGROLTD’s case, the ratio of 1.87x 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.