Investors are always looking for growth in small-cap stocks like Pincon Spirit Limited (NSEI:PINCON), with a market cap of ₹656.88M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, 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 PINCON here.

Does PINCON generate enough cash through operations?

PINCON has built up its total debt levels in the last twelve months, from ₹2.54B to ₹2.97B , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹5.12M , ready to deploy into the business. Additionally, PINCON has produced ₹44.87M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 1.51%, indicating that PINCON’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PINCON’s case, it is able to generate 0.015x cash from its debt capital.

Can PINCON meet its short-term obligations with the cash in hand?

With current liabilities at ₹3.40B, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. For Beverage companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

Does PINCON face the risk of succumbing to its debt-load?

PINCON is a highly-leveraged company with debt exceeding equity by over 100%. 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 PINCON 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 PINCON’s, case, the ratio of 3.74x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as PINCON’s high interest coverage is seen as responsible and safe practice.

Next Steps:

At its current level of cash flow coverage, PINCON has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure PINCON has company-specific issues impacting its capital structure decisions. I recommend you continue to research Pincon Spirit to get a better picture of the stock by looking at: