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Garware-Wall Ropes Limited (NSE:GARWALLROP) is a small-cap stock with a market capitalization of ₹21.69b. 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 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. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into GARWALLROP here.
Does GARWALLROP produce enough cash relative to debt?
GARWALLROP’s debt levels surged from ₹857.11m to ₹1.38b over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, GARWALLROP currently has ₹235.09m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of GARWALLROP’s operating efficiency ratios such as ROA here.
Can GARWALLROP meet its short-term obligations with the cash in hand?
Looking at GARWALLROP’s most recent ₹4.09b liabilities, it seems that the business has been able to meet these commitments with a current assets level of ₹4.90b, leading to a 1.2x current account ratio. Usually, for Luxury companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can GARWALLROP service its debt comfortably?
With a debt-to-equity ratio of 25.78%, GARWALLROP’s debt level may be seen as prudent. GARWALLROP is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether GARWALLROP 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 GARWALLROP’s, case, the ratio of 14.55x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.