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While small-cap stocks, such as Mahamaya Steel Industries Limited (NSEI:MAHASTEEL) with its market cap of ₹820.33M, 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into MAHASTEEL here.
How does MAHASTEEL’s operating cash flow stack up against its debt?
Over the past year, MAHASTEEL has reduced its debt from ₹714.44M to ₹657.76M – this includes both the current and long-term debt. With this reduction in debt, MAHASTEEL currently has ₹42.40M remaining in cash and short-term investments , ready to deploy into the business. Additionally, MAHASTEEL has generated ₹59.67M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 9.07%, meaning that MAHASTEEL’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MAHASTEEL’s case, it is able to generate 0.091x cash from its debt capital.
Can MAHASTEEL pay its short-term liabilities?
Looking at MAHASTEEL’s most recent ₹762.93M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹889.97M, with a current ratio of 1.17x. Usually, for Metals and Mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does MAHASTEEL face the risk of succumbing to its debt-load?
MAHASTEEL is a relatively highly levered company with a debt-to-equity of 56.10%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if MAHASTEEL’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For MAHASTEEL, the ratio of 1.42x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
At its current level of cash flow coverage, MAHASTEEL has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure MAHASTEEL has company-specific issues impacting its capital structure decisions. You should continue to research Mahamaya Steel Industries to get a better picture of the stock by looking at: