Are K.C.P. Sugar and Industries Corporation Limited’s (NSE:KCPSUGIND) Interest Costs Too High?

Kelly Murphy

Wed, Feb 13, 2019, 7:37 PM

While small-cap stocks, such as K.C.P. Sugar and Industries Corporation Limited (NSE:KCPSUGIND) with its market cap of ₹1.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into KCPSUGIND here.

Does KCPSUGIND produce enough cash relative to debt?

KCPSUGIND has built up its total debt levels in the last twelve months, from ₹1.4b to ₹2.1b , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at ₹1.1b for investing into the business. Moving onto cash from operations, 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 assess some of KCPSUGIND’s operating efficiency ratios such as ROA here.

Does KCPSUGIND’s liquid assets cover its short-term commitments?

With current liabilities at ₹2.6b, the company has been able to meet these obligations given the level of current assets of ₹3.9b, with a current ratio of 1.52x. Generally, for Food companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NSEI:KCPSUGIND Historical Debt February 14th 19

Does KCPSUGIND face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 74%, KCPSUGIND can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 KCPSUGIND’s case, the ratio of 8.97x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as KCPSUGIND’s high interest coverage is seen as responsible and safe practice.