Investors are always looking for growth in small-cap stocks like KPIT Technologies Limited (NSEI:KPIT), with a market cap of ₹32.39B. However, an important fact which most ignore is: how financially healthy is the business? Software companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into KPIT here.
Does KPIT generate enough cash through operations?
KPIT’s debt levels surged from ₹2,502.3M to ₹3,862.3M over the last 12 months , which is made up of current and long term debt. With this rise in debt, KPIT currently has ₹4,679.5M remaining in cash and short-term investments , ready to deploy into the business. Moreover, KPIT has produced ₹1,630.3M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 42.21%, signalling that KPIT’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KPIT’s case, it is able to generate 0.42x cash from its debt capital.
Does KPIT’s liquid assets cover its short-term commitments?
Looking at KPIT’s most recent ₹7,675.7M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.91x. Generally, for software companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does KPIT face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 18.62%, KPIT’s debt level may be seen as prudent. This range is considered safe as KPIT is not taking on too much debt obligation, which may be constraining for future growth. We can test if KPIT’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For KPIT, the ratio of 416.48x suggests that interest is excessively covered, which means that debtors may be willing to loan the company more money, giving KPIT ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? KPIT’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may be different. I suggest researching market expectations for KPIT’s future growth on our free analysis platform.