Future Enterprises Limited (NSEI:FEL) is a small-cap stock with a market capitalization of ₹24.13B. 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 a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into FEL here.

Does FEL generate enough cash through operations?

Over the past year, FEL has ramped up its debt from ₹49,064.5M to ₹52,861.0M – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at ₹1,465.1M for investing into the business. Moreover, FEL has produced cash from operations of ₹9,754.1M over the same time period, leading to an operating cash to total debt ratio of 18.45%, signalling that FEL’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FEL’s case, it is able to generate 0.18x cash from its debt capital.

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

Looking at FEL’s most recent ₹11,737.8M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.24x. For industrials companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

Can FEL service its debt comfortably?

Since total debt levels have outpaced equities, FEL is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether FEL 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 FEL’s, case, the ratio of 0.92x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as FEL’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Are you a shareholder? FEL’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may be different. You should always be keeping on top of market expectations for FEL’s future growth on our free analysis platform.

Are you a potential investor? With a high level of debt on its balance sheet, FEL could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for FEL to increase its operational efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I encourage you to continue your research by taking a look at FEL’s past performance analysis on our free platform to figure out FEL’s financial health position.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.