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Greenply Industries Limited (NSE:GREENPLY) is a small-cap stock with a market capitalization of ₹18b. 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 vital, 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. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into GREENPLY here.
How does GREENPLY’s operating cash flow stack up against its debt?
Over the past year, GREENPLY has ramped up its debt from ₹4.5b to ₹7.1b – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at ₹344m for investing into the business. On top of this, GREENPLY has produced cash from operations of ₹1.1b over the same time period, resulting in an operating cash to total debt ratio of 16%, meaning that GREENPLY’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GREENPLY’s case, it is able to generate 0.16x cash from its debt capital.
Can GREENPLY meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹6.2b, it seems that the business has been able to meet these commitments with a current assets level of ₹6.5b, leading to a 1.05x current account ratio. Usually, for Forestry companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does GREENPLY face the risk of succumbing to its debt-load?
With debt reaching 81% of equity, GREENPLY may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Next Steps:
GREENPLY’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around GREENPLY’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure GREENPLY has company-specific issues impacting its capital structure decisions. I suggest you continue to research Greenply Industries to get a more holistic view of the small-cap by looking at: