In This Article:
While small-cap stocks, such as Himadri Speciality Chemical Limited (NSE:HSCL) with its market cap of ₹51.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into HSCL here.
Does HSCL produce enough cash relative to debt?
Over the past year, HSCL has reduced its debt from ₹7.7b to ₹6.6b – this includes both the current and long-term debt. With this debt payback, HSCL currently has ₹199m remaining in cash and short-term investments for investing into the business. Additionally, HSCL has generated cash from operations of ₹2.6b over the same time period, resulting in an operating cash to total debt ratio of 39%, signalling that HSCL’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HSCL’s case, it is able to generate 0.39x cash from its debt capital.
Can HSCL meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹6.6b liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹8.6b, leading to a 1.29x current account ratio. For Chemicals companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does HSCL face the risk of succumbing to its debt-load?
HSCL is a relatively highly levered company with a debt-to-equity of 47%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In HSCL’s case, the ratio of 7.11x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as HSCL’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although HSCL’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. This is only a rough assessment of financial health, and I’m sure HSCL has company-specific issues impacting its capital structure decisions. You should continue to research Himadri Speciality Chemical to get a more holistic view of the small-cap by looking at: