While small-cap stocks, such as Bansal Multiflex Limited (NSE:BANSAL) with its market cap of ₹508m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health 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. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into BANSAL here.
Does BANSAL produce enough cash relative to debt?
BANSAL’s debt levels have fallen from ₹65m to ₹60m over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, BANSAL currently has ₹28m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of BANSAL’s operating efficiency ratios such as ROA here.
Does BANSAL’s liquid assets cover its short-term commitments?
Looking at BANSAL’s most recent ₹131m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of ₹295m, with a current ratio of 2.25x. Generally, for Retail Distributors companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can BANSAL service its debt comfortably?
With debt at 38% of equity, BANSAL may be thought of as appropriately levered. This range is considered safe as BANSAL is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if BANSAL’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 BANSAL, the ratio of 4.09x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving BANSAL ample headroom to grow its debt facilities.
Next Steps:
BANSAL’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure BANSAL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Bansal Multiflex to get a more holistic view of the stock by looking at: