Investors are always looking for growth in small-cap stocks like Housing Development and Infrastructure Limited (NSEI:HDIL), with a market cap of ₹13.54B. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, 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. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into HDIL here.
How does HDIL’s operating cash flow stack up against its debt?
Over the past year, HDIL has reduced its debt from ₹30.85B to ₹26.58B , which is made up of current and long term debt. With this debt payback, HDIL’s cash and short-term investments stands at ₹1.36B for investing into the business. On top of this, HDIL has produced cash from operations of ₹6.27B during the same period of time, leading to an operating cash to total debt ratio of 23.60%, indicating that HDIL’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HDIL’s case, it is able to generate 0.24x cash from its debt capital.
Does HDIL’s liquid assets cover its short-term commitments?
Looking at HDIL’s most recent ₹51.37B liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.49x. However, anything about 3x may be excessive, since HDIL may be leaving too much capital in low-earning investments.
Can HDIL service its debt comfortably?
HDIL’s level of debt is appropriate relative to its total equity, at 21.15%. HDIL is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether HDIL 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 HDIL’s, case, the ratio of 1.33x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Although HDIL’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how HDIL has been performing in the past. I recommend you continue to research Housing Development and Infrastructure to get a better picture of the stock by looking at: