While small-cap stocks, such as Creative Peripherals and Distribution Limited (NSEI:CREATIVE) with its market cap of ₹810.84M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Electronic companies, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into CREATIVE here.
Does CREATIVE generate an acceptable amount of cash through operations?
CREATIVE’s debt levels surged from ₹175.81M to ₹232.99M over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, CREATIVE currently has ₹17.35M remaining in cash and short-term investments , ready to deploy 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 examine some of CREATIVE’s operating efficiency ratios such as ROA here.
Can CREATIVE meet its short-term obligations with the cash in hand?
With current liabilities at ₹501.59M, the company has been able to meet these commitments with a current assets level of ₹612.54M, leading to a 1.22x current account ratio. Usually, for Electronic 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.
Does CREATIVE face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, CREATIVE is a highly 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 check to see whether CREATIVE 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 CREATIVE’s, case, the ratio of 1.73x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CREATIVE’s low interest coverage already puts the company at higher risk of default.