Omfurn India Limited (NSEI:OMFURN) is a small-cap stock with a market capitalization of ₹126.02M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? 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. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into OMFURN here.
Does OMFURN generate enough cash through operations?
OMFURN has shrunken its total debt levels in the last twelve months, from ₹80.46M to ₹76.03M , which comprises of short- and long-term debt. With this debt repayment, OMFURN currently has ₹20.53M remaining in cash and short-term investments for investing into the business. Moreover, OMFURN has produced ₹10.12M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 13.32%, indicating that OMFURN’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In OMFURN’s case, it is able to generate 0.13x cash from its debt capital.
Does OMFURN’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹111.10M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of ₹202.88M, with a current ratio of 1.83x. Generally, for Commercial Services companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does OMFURN face the risk of succumbing to its debt-load?
OMFURN is a relatively highly levered company with a debt-to-equity of 48.50%. 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 OMFURN’s case, the ratio of 5.32x 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.