Investors are always looking for growth in small-cap stocks like Crown Lifters Limited (NSEI:CROWN), with a market cap of ₹158.23M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into CROWN here.
Does CROWN generate enough cash through operations?
CROWN’s debt levels surged from ₹250.68M to ₹389.77M over the last 12 months , which is made up of current and long term debt. With this increase in debt, CROWN currently has ₹12.79M remaining in cash and short-term investments , ready to deploy into the business. Moreover, CROWN has generated ₹71.07M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 18.23%, signalling that CROWN’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 CROWN’s case, it is able to generate 0.18x cash from its debt capital.
Does CROWN’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹88.05M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of ₹72.30M, leading to a 0.82x current account ratio. which is under the appropriate industry ratio of 3x.
Does CROWN face the risk of succumbing to its debt-load?
CROWN is a highly-leveraged company with debt exceeding equity by over 100%. 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 CROWN’s case, the ratio of 0.97x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
CROWN’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for CROWN’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Crown Lifters to get a more holistic view of the stock by looking at: