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Investors are always looking for growth in small-cap stocks like Vijay Shanthi Builders Limited (NSE:VIJSHAN), with a market cap of ₹143m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into VIJSHAN here.
How does VIJSHAN’s operating cash flow stack up against its debt?
VIJSHAN’s debt levels have fallen from ₹730m to ₹568m over the last 12 months , which also accounts for long term debt. With this debt repayment, VIJSHAN currently has ₹8.9m remaining in cash and short-term investments for investing into the business. On top of this, VIJSHAN has generated ₹150m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 26%, meaning that VIJSHAN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In VIJSHAN’s case, it is able to generate 0.26x cash from its debt capital.
Can VIJSHAN meet its short-term obligations with the cash in hand?
With current liabilities at ₹377m, the company has been able to meet these commitments with a current assets level of ₹1.9b, leading to a 5.04x current account ratio. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Is VIJSHAN’s debt level acceptable?
With debt reaching 45% of equity, VIJSHAN may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Next Steps:
VIJSHAN’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around VIJSHAN’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure VIJSHAN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Vijay Shanthi Builders to get a more holistic view of the small-cap by looking at: