While small-cap stocks, such as M K Proteins Limited (NSEI:MKPL) with its market cap of ₹333.66M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, 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, this commentary is still very high-level, so I suggest you dig deeper yourself into MKPL here.
Does MKPL generate enough cash through operations?
MKPL’s debt levels surged from ₹261.9M to ₹307.7M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, MKPL’s cash and short-term investments stands at ₹0.4M , ready to deploy into the business. Though its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of MKPL’s operating efficiency ratios such as ROA here.
Can MKPL meet its short-term obligations with the cash in hand?
Looking at MKPL’s most recent ₹299.7M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹389.3M, with a current ratio of 1.3x. For food companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can MKPL service its debt comfortably?
With total debt exceeding equities, MKPL is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 MKPL’s case, the ratio of 1.67x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as MKPL’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, MKPL has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that its financial position may change. You should always be keeping abreast of market expectations for MKPL’s future growth on our free analysis platform.