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Investors are always looking for growth in small-cap stocks like Jindal Saw Limited (NSE:JINDALSAW), with a market cap of ₹28.63b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes 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. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into JINDALSAW here.
Does JINDALSAW produce enough cash relative to debt?
JINDALSAW’s debt level has been constant at around ₹63.11b over the previous year – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at ₹822.5m for investing into the business. Additionally, JINDALSAW has generated ₹5.65b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 9.0%, meaning that JINDALSAW’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In JINDALSAW’s case, it is able to generate 0.09x cash from its debt capital.
Does JINDALSAW’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹42.19b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of ₹53.39b, with a current ratio of 1.27x. Generally, for Metals and Mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does JINDALSAW face the risk of succumbing to its debt-load?
With total debt exceeding equities, JINDALSAW is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether JINDALSAW 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 JINDALSAW’s, case, the ratio of 1.77x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as JINDALSAW’s low interest coverage already puts the company at higher risk of default.
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JINDALSAW’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure JINDALSAW has company-specific issues impacting its capital structure decisions. I recommend you continue to research Jindal Saw to get a more holistic view of the stock by looking at: