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While small-cap stocks, such as I G Petrochemicals Limited (NSE:IGPL) with its market cap of ₹9.9b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into IGPL here.
Does IGPL Produce Much Cash Relative To Its Debt?
Over the past year, IGPL has ramped up its debt from ₹822m to ₹956m – this includes long-term debt. With this increase in debt, IGPL currently has ₹512m remaining in cash and short-term investments to keep the business going. On top of this, IGPL has generated ₹2.0b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 210%, signalling that IGPL’s current level of operating cash is high enough to cover debt.
Does IGPL’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹2.3b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is IGPL’s debt level acceptable?
With debt at 18% of equity, IGPL may be thought of as appropriately levered. This range is considered safe as IGPL is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether IGPL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In IGPL’s, case, the ratio of 26.2x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as IGPL’s high interest coverage is seen as responsible and safe practice.
Next Steps:
IGPL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for IGPL’s financial health. Other important fundamentals need to be considered alongside. You should continue to research I G Petrochemicals to get a better picture of the stock by looking at: