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Investors are always looking for growth in small-cap stocks like GHCL Limited (NSE:GHCL), with a market cap of ₹21.36b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes 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 suggest you dig deeper yourself into GHCL here.
How much cash does GHCL generate through its operations?
Over the past year, GHCL has reduced its debt from ₹14.63b to ₹13.22b , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at ₹136.4m for investing into the business. Additionally, GHCL has generated cash from operations of ₹5.90b in the last twelve months, leading to an operating cash to total debt ratio of 44.6%, meaning that GHCL’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GHCL’s case, it is able to generate 0.45x cash from its debt capital.
Does GHCL’s liquid assets cover its short-term commitments?
With current liabilities at ₹10.72b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.93x.
Does GHCL face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 82.1%, GHCL can be considered as an above-average leveraged company. 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 GHCL’s case, the ratio of 4.83x 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.
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Although GHCL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for GHCL’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research GHCL to get a better picture of the stock by looking at: