Stocks with market capitalization between $2B and $10B, such as Torrent Power Limited (NSEI:TORNTPOWER) with a size of ₹131.93B, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. I recommend you look at the following hurdles to assess TORNTPOWER’s financial health. View our latest analysis for Torrent Power
Can TORNTPOWER service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For TORNTPOWER, the debt-to-equity ratio stands at above 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, availability of cash may dry up, making it hard to operate. 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 (EBIT) at least three times its interest payments is considered financially sound. TORNTPOWER’s profits only covers interest 2.21 times, which is deemed as inadequate. Debtors may be less inclined to loan the company more money, giving TORNTPOWER less headroom for growth through debt.
Can TORNTPOWER meet its short-term obligations with the cash in hand?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. We need to assess TORNTPOWER’s cash and other liquid assets against its upcoming expenses. Our analysis shows that TORNTPOWER is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? Although TORNTPOWER’s debt level is towards the higher end of the spectrum, investors shouldn’t panic since its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Given that TORNTPOWER’s capital structure may change, You should continue assessing market expectations for TORNTPOWER’s future growth on our free analysis platform.