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Bhagyanagar India Limited (NSE:BHAGYNAGAR) is a small-cap stock with a market capitalization of ₹1.0b. 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 vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into BHAGYNAGAR here.
How does BHAGYNAGAR’s operating cash flow stack up against its debt?
Over the past year, BHAGYNAGAR has reduced its debt from ₹761m to ₹456m – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at ₹151m for investing into the business. Moreover, BHAGYNAGAR has generated cash from operations of ₹279m in the last twelve months, leading to an operating cash to total debt ratio of 61%, meaning that BHAGYNAGAR’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BHAGYNAGAR’s case, it is able to generate 0.61x cash from its debt capital.
Does BHAGYNAGAR’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹346m 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 2.9x. For Electrical companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is BHAGYNAGAR’s debt level acceptable?
BHAGYNAGAR’s level of debt is appropriate relative to its total equity, at 39%. This range is considered safe as BHAGYNAGAR is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if BHAGYNAGAR’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 BHAGYNAGAR, the ratio of 11.07x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving BHAGYNAGAR ample headroom to grow its debt facilities.