Mid-caps stocks, like Dalmia Bharat Limited (NSEI:DALMIABHA) with a market capitalization of ₹284.51B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Mid-caps are found to be more volatile than the large-caps but safer than small-caps, largely due to their weaker balance sheet. I recommend you look at the following hurdles to assess DALMIABHA’s financial health. Check out our latest analysis for Dalmia Bharat
Is DALMIABHA’s level of debt at an acceptable level?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. DALMIABHA’s debt-to-equity ratio exceeds 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, availability of cash may dry up, making it hard to operate. We can test if DALMIABHA’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings (EBIT) should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. In DALMIABHA’s case, its interest is not sufficiently covered by its profits as the ratio is 2.22x. Lenders may be more reluctant to lend out more funding as DALMIABHA’s low interest coverage already puts the company at higher risk of default.
Can DALMIABHA meet its short-term obligations with the cash in hand?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. To assess this, I compare DALMIABHA’s cash and other liquid assets against its upcoming debt. Our analysis shows that DALMIABHA does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Next Steps:
Are you a shareholder? DALMIABHA’s high debt levels are not met with high cash flow coverage. This means investors should ask themselves if they think DALMIABHA can improve in terms of debt management and operational efficiency. Since DALMIABHA’s financial position could change over time, I recommend assessing market expectations for DALMIABHA’s future growth on our free analysis platform.
Are you a potential investor? While understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. After all, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. DALMIABHA’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.