Perfect Infraengineers Limited (NSEI:PERFECT) is a small-cap stock with a market capitalization of ₹224.34M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? 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. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into PERFECT here.
How does PERFECT’s operating cash flow stack up against its debt?
PERFECT has built up its total debt levels in the last twelve months, from ₹106.6M to ₹124.4M , which is made up of current and long term debt. With this increase in debt, PERFECT currently has ₹6.8M remaining in cash and short-term investments for investing into the business. On top of this, PERFECT has produced ₹2.8M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 0.02x, meaning that PERFECT’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 PERFECT’s case, it is able to generate 0.02x cash from its debt capital.
Does PERFECT’s liquid assets cover its short-term commitments?
With current liabilities at ₹150.9M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.5x. For machinery companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is PERFECT’s level of debt at an acceptable level?
With debt reaching 93.27% of equity, PERFECT 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 PERFECT’s case, the ratio of 1.77x 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.