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While small-cap stocks, such as Eveready Industries India Limited (NSE:EVEREADY) with its market cap of ₹13b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into EVEREADY here.
EVEREADY’s Debt (And Cash Flows)
EVEREADY's debt levels surged from ₹2.2b to ₹2.6b over the last 12 months – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹50m , ready to be used for running the business. Moreover, EVEREADY has produced ₹808m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 31%, signalling that EVEREADY’s debt is appropriately covered by operating cash.
Can EVEREADY pay its short-term liabilities?
With current liabilities at ₹5.8b, the company has been able to meet these commitments with a current assets level of ₹6.2b, leading to a 1.07x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Household Products companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is EVEREADY’s debt level acceptable?
EVEREADY is a relatively highly levered company with a debt-to-equity of 77%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In EVEREADY's case, the ratio of 6.23x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving EVEREADY ample headroom to grow its debt facilities.
Next Steps:
Although EVEREADY’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how EVEREADY has been performing in the past. You should continue to research Eveready Industries India to get a more holistic view of the small-cap by looking at: