In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
While small-cap stocks, such as Brigade Enterprises Limited (NSE:BRIGADE) with its market cap of ₹34b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into BRIGADE here.
BRIGADE’s Debt (And Cash Flows)
BRIGADE's debt level has been constant at around ₹34b over the previous year including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at ₹2.7b to keep the business going. On top of this, BRIGADE has generated cash from operations of ₹4.5b during the same period of time, leading to an operating cash to total debt ratio of 13%, indicating that BRIGADE’s operating cash is less than its debt.
Does BRIGADE’s liquid assets cover its short-term commitments?
Looking at BRIGADE’s ₹50b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹58b, leading to a 1.16x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Real Estate 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 BRIGADE service its debt comfortably?
BRIGADE is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BRIGADE's case, the ratio of 2.33x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
BRIGADE’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how BRIGADE has been performing in the past. I recommend you continue to research Brigade Enterprises to get a more holistic view of the small-cap by looking at: