Investors are always looking for growth in small-cap stocks like High Ground Enterprise Ltd (NSE:HIGHGROUND), with a market cap of ₹1.1b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes 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. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into HIGHGROUND here.
How does HIGHGROUND’s operating cash flow stack up against its debt?
Over the past year, HIGHGROUND has ramped up its debt from ₹544m to ₹693m , which is mainly comprised of near term debt. With this increase in debt, HIGHGROUND currently has ₹59m remaining in cash and short-term investments , ready to deploy into the business. Additionally, HIGHGROUND has produced cash from operations of ₹26m during the same period of time, leading to an operating cash to total debt ratio of 3.8%, meaning that HIGHGROUND’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HIGHGROUND’s case, it is able to generate 0.038x cash from its debt capital.
Does HIGHGROUND’s liquid assets cover its short-term commitments?
With current liabilities at ₹2.3b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.48x. Generally, for Construction companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can HIGHGROUND service its debt comfortably?
HIGHGROUND is a relatively highly levered company with a debt-to-equity of 59%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if HIGHGROUND’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HIGHGROUND, the ratio of 4.88x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving HIGHGROUND ample headroom to grow its debt facilities.
Next Steps:
At its current level of cash flow coverage, HIGHGROUND has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for HIGHGROUND’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research High Ground Enterprise to get a better picture of the stock by looking at: