While small-cap stocks, such as Accord Synergy Limited (NSEI:ACCORD) with its market cap of ₹163.18M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about 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, I know these factors are very high-level, so I suggest you dig deeper yourself into ACCORD here.
How does ACCORD’s operating cash flow stack up against its debt?
ACCORD’s debt levels have fallen from ₹112.06M to ₹84.24M over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, ACCORD’s cash and short-term investments stands at ₹1.39M for investing into the business. Additionally, ACCORD has generated ₹58.11M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 68.98%, meaning that ACCORD’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 ACCORD’s case, it is able to generate 0.69x cash from its debt capital.
Does ACCORD’s liquid assets cover its short-term commitments?
With current liabilities at ₹77.28M, it appears that the company has been able to meet these commitments with a current assets level of ₹199.86M, leading to a 2.59x current account ratio. For Commercial Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is ACCORD’s debt level acceptable?
Since total debt levels have outpaced equities, ACCORD is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether ACCORD 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 ACCORD’s, case, the ratio of 5.42x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ACCORD’s high interest coverage is seen as responsible and safe practice.