Globe Textiles (India) Ltd (NSEI:GLOBE) is a small-cap stock with a market capitalization of ₹473.58M. 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? So, understanding the company’s financial health becomes essential, since poor capital management may bring about 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, I know these factors are very high-level, so I suggest you dig deeper yourself into GLOBE here.
How does GLOBE’s operating cash flow stack up against its debt?
GLOBE’s debt levels surged from ₹401.8M to ₹532.5M over the last 12 months , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at ₹10.7M , ready to deploy into the business. Though its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of GLOBE’s operating efficiency ratios such as ROA here.
Can GLOBE meet its short-term obligations with the cash in hand?
With current liabilities at ₹780.7M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹876.9M, with a current ratio of 1.12x. Usually, for luxury companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is GLOBE’s level of debt at an acceptable level?
GLOBE is a highly-leveraged company with debt exceeding equity by over 100%. 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 GLOBE’s case, the ratio of 2.34x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as GLOBE’s low interest coverage already puts the company at higher risk of default.