Skipper Limited (NSEI:SKIPPER) is a small-cap stock with a market capitalization of ₹27.21B. 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? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to 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, this commentary is still very high-level, so I recommend you dig deeper yourself into SKIPPER here.
Does SKIPPER generate an acceptable amount of cash through operations?
Over the past year, SKIPPER has reduced its debt from ₹4,682.0M to ₹4,378.4M , which is made up of current and long term debt. With this debt payback, SKIPPER currently has ₹249.4M remaining in cash and short-term investments for investing into the business. Additionally, SKIPPER has produced ₹1,752.3M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 40.02%, meaning that SKIPPER’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 SKIPPER’s case, it is able to generate 0.4x cash from its debt capital.
Can SKIPPER pay its short-term liabilities?
Looking at SKIPPER’s most recent ₹6,195.5M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.35x. Usually, for metals and mining companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is SKIPPER’s level of debt at an acceptable level?
With a debt-to-equity ratio of 95.91%, SKIPPER can be considered as an above-average 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 SKIPPER’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 SKIPPER, the ratio of 3.63x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SKIPPER’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Are you a shareholder? Although SKIPPER’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around SKIPPER’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, SKIPPER’s financial situation may change. I recommend keeping abreast of market expectations for SKIPPER’s future growth on our free analysis platform.