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Investors are always looking for growth in small-cap stocks like Radico Khaitan Limited (NSEI:RADICO), with a market cap of ₹58.10B. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, 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, since I only look at basic financial figures, I recommend you dig deeper yourself into RADICO here.
Does RADICO generate an acceptable amount of cash through operations?
RADICO has shrunken its total debt levels in the last twelve months, from ₹9.60B to ₹7.99B – this includes both the current and long-term debt. With this debt repayment, RADICO currently has ₹640.68M remaining in cash and short-term investments , ready to deploy into the business. Moreover, RADICO has produced cash from operations of ₹2.50B during the same period of time, resulting in an operating cash to total debt ratio of 31.25%, meaning that RADICO’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RADICO’s case, it is able to generate 0.31x cash from its debt capital.
Can RADICO pay its short-term liabilities?
With current liabilities at ₹10.09B, the company has been able to meet these obligations given the level of current assets of ₹12.47B, with a current ratio of 1.24x. Generally, for Beverage companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is RADICO’s debt level acceptable?
With debt reaching 76.53% of equity, RADICO may be thought of as relatively highly levered. 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 RADICO 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 RADICO’s, case, the ratio of 2.84x 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.
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RADICO’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for RADICO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Radico Khaitan to get a more holistic view of the small-cap by looking at: