Himachal Futuristic Communications Limited (NSEI:HFCL) is a small-cap stock with a market capitalization of ₹36.19B. 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? Companies operating in the Telecom industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into HFCL here.

How does HFCL’s operating cash flow stack up against its debt?

HFCL’s debt level has been constant at around ₹5,387.4M over the previous year made up of current and long term debt. At this current level of debt, HFCL’s cash and short-term investments stands at ₹1,016.1M , ready to deploy into the business. Additionally, HFCL has produced cash from operations of ₹1,356.7M in the last twelve months, resulting in an operating cash to total debt ratio of 25.18%, meaning that HFCL’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HFCL’s case, it is able to generate 0.25x cash from its debt capital.

Can HFCL pay its short-term liabilities?

With current liabilities at ₹10,234.5M, it appears that the company has been able to meet these commitments with a current assets level of ₹20,282.6M, leading to a 1.98x current account ratio. For Telecom companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can HFCL service its debt comfortably?

With debt reaching 55.79% of equity, HFCL may be thought of as relatively highly levered. 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 HFCL’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 HFCL, the ratio of 4.58x 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:

HFCL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around HFCL’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure HFCL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Himachal Futuristic Communications to get a better picture of the stock by looking at: