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Investors are always looking for growth in small-cap stocks like NACL Industries Limited (NSE:NACLIND), with a market cap of ₹5.92b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into NACLIND here.
How does NACLIND’s operating cash flow stack up against its debt?
Over the past year, NACLIND has ramped up its debt from ₹2.12b to ₹2.37b – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at ₹68.60m for investing into the business. Moreover, NACLIND has generated ₹244.80m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 10.33%, signalling that NACLIND’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NACLIND’s case, it is able to generate 0.1x cash from its debt capital.
Does NACLIND’s liquid assets cover its short-term commitments?
Looking at NACLIND’s most recent ₹4.32b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of ₹5.30b, with a current ratio of 1.23x. Generally, for Chemicals companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is NACLIND’s debt level acceptable?
With debt reaching 99.08% of equity, NACLIND may be thought of as relatively highly levered. 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 NACLIND’s case, the ratio of 2.44x 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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At its current level of cash flow coverage, NACLIND has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for NACLIND’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research NACL Industries to get a better picture of the stock by looking at: