Investors are always looking for growth in small-cap stocks like Eveready Industries India Limited (NSE:EVEREADY), with a market cap of ₹15.25b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes 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. However, since I only look at basic financial figures, I recommend you dig deeper yourself into EVEREADY here.

How much cash does EVEREADY generate through its operations?

EVEREADY has built up its total debt levels in the last twelve months, from ₹2.16b to ₹2.64b , which is made up of current and long term debt. With this increase in debt, EVEREADY currently has ₹50.0m remaining in cash and short-term investments for investing into the business. On top of this, EVEREADY has generated cash from operations of ₹807.9m in the last twelve months, resulting in an operating cash to total debt ratio of 30.6%, signalling that EVEREADY’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 EVEREADY’s case, it is able to generate 0.31x cash from its debt capital.

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

At the current liabilities level of ₹5.84b liabilities, the company has been able to meet these commitments with a current assets level of ₹6.24b, leading to a 1.07x current account ratio. Usually, for Household Products companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

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

EVEREADY is a relatively highly levered company with a debt-to-equity of 77.0%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 EVEREADY’s case, the ratio of 6.23x suggests that interest is appropriately 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.

Next Steps:

Although EVEREADY’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. Since there is also no concerns around EVEREADY’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for EVEREADY’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Eveready Industries India to get a better picture of the small-cap by looking at: