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While small-cap stocks, such as Jindal Saw Limited (NSE:JINDALSAW) with its market cap of ₹24b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into JINDALSAW here.
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Does JINDALSAW Produce Much Cash Relative To Its Debt?
Over the past year, JINDALSAW has maintained its debt levels at around ₹63b which accounts for long term debt. At this current level of debt, JINDALSAW's cash and short-term investments stands at ₹823m to keep the business going. On top of this, JINDALSAW has produced ₹5.7b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 9.0%, indicating that JINDALSAW’s current level of operating cash is not high enough to cover debt.
Can JINDALSAW pay its short-term liabilities?
At the current liabilities level of ₹42b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.27x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Metals and Mining companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does JINDALSAW face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, JINDALSAW is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 refuse to lend the company more money, as it is seen as too risky in terms of default.
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Although JINDALSAW’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how JINDALSAW has been performing in the past. I recommend you continue to research Jindal Saw to get a more holistic view of the small-cap by looking at: