Investors are always looking for growth in small-cap stocks like Libas Designs Limited (NSEI:LIBAS), with a market cap of ₹697.50M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, 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. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into LIBAS here.
Does LIBAS generate enough cash through operations?
Over the past year, LIBAS has ramped up its debt from ₹44.8M to ₹61.6M , which is mainly comprised of near term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹2.9M , ready to deploy into the business. Moreover, LIBAS has generated ₹4.0M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 0.07x, signalling that LIBAS’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LIBAS’s case, it is able to generate 0.07x cash from its debt capital.
Can LIBAS meet its short-term obligations with the cash in hand?
Looking at LIBAS’s most recent ₹137.0M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹174.2M, with a current ratio of 1.27x. Generally, for textiles, apparel and luxury goods companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does LIBAS face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, LIBAS is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if LIBAS’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LIBAS, the ratio of 2.95x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Are you a shareholder? LIBAS’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may change. I suggest researching market expectations for LIBAS’s future growth on our free analysis platform.