Investors are always looking for growth in small-cap stocks like CMM Infraprojects Limited (NSE:CMMIPL), with a market cap of ₹356.6m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to 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 CMMIPL here.
Does CMMIPL produce enough cash relative to debt?
Over the past year, CMMIPL has ramped up its debt from ₹426.0m to ₹460.2m , which comprises of short- and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at ₹94.1m for investing into the business. Moreover, CMMIPL has generated ₹25.7m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 5.6%, signalling that CMMIPL’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 CMMIPL’s case, it is able to generate 0.056x cash from its debt capital.
Does CMMIPL’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹601.8m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of ₹1.02b, with a current ratio of 1.7x. Generally, for Construction companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CMMIPL face the risk of succumbing to its debt-load?
With debt reaching 84.1% of equity, CMMIPL may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 CMMIPL’s case, the ratio of 4.53x 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:
CMMIPL’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure CMMIPL has company-specific issues impacting its capital structure decisions. I recommend you continue to research CMM Infraprojects to get a better picture of the stock by looking at: