While small-cap stocks, such as Precot Meridian Limited (NSEI:PRECOT) with its market cap of ₹1.14B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into PRECOT here.
How does PRECOT’s operating cash flow stack up against its debt?
PRECOT has shrunken its total debt levels in the last twelve months, from ₹3,991.5M to ₹3,521.6M – this includes both the current and long-term debt. With this debt repayment, PRECOT currently has ₹48.3M remaining in cash and short-term investments , ready to deploy into the business. Additionally, PRECOT has generated ₹190.9M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 0.05x, meaning that PRECOT’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PRECOT’s case, it is able to generate 0.05x cash from its debt capital.
Does PRECOT’s liquid assets cover its short-term commitments?
Looking at PRECOT’s most recent ₹3,128.6M liabilities, the company is not able to meet these obligations given the level of current assets of ₹2,134.3M, with a current ratio of 0.68x below the prudent level of 3x.
Is PRECOT’s level of debt at an acceptable level?
Since total debt levels have outpaced equities, PRECOT is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Next Steps:
Are you a shareholder? PRECOT’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, PRECOT’s financial situation may change. You should always be researching market expectations for PRECOT’s future growth on our free analysis platform.
Are you a potential investor? PRECOT’s large debt ratio on top of low cash coverage of debt in addition to low liquidity coverage of near-term commitments may scare some investors away intially. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of PRECOT’s track record. I encourage you to continue your research by taking a look at PRECOT’s past performance analysis on our free platform to figure out PRECOT’s financial health position.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.