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Investors are always looking for growth in small-cap stocks like Technocraft Industries (India) Limited (NSE:TIIL), with a market cap of ₹12.43b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into TIIL here.
How does TIIL’s operating cash flow stack up against its debt?
TIIL has built up its total debt levels in the last twelve months, from ₹3.42b to ₹5.11b , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at ₹1.48b for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of TIIL’s operating efficiency ratios such as ROA here.
Can TIIL pay its short-term liabilities?
At the current liabilities level of ₹6.04b liabilities, the company has been able to meet these commitments with a current assets level of ₹9.88b, leading to a 1.64x current account ratio. Generally, for Machinery companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is TIIL’s debt level acceptable?
TIIL is a relatively highly levered company with a debt-to-equity of 71.6%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether TIIL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TIIL’s, case, the ratio of 10.32x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
At its current level of cash flow coverage, TIIL has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how TIIL has been performing in the past. I suggest you continue to research Technocraft Industries (India) to get a more holistic view of the stock by looking at: