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EIH Limited (NSE:EIHOTEL) is a small-cap stock with a market capitalization of ₹105b. 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? Evaluating financial health as part of your investment thesis 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. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into EIHOTEL here.
How does EIHOTEL’s operating cash flow stack up against its debt?
EIHOTEL has built up its total debt levels in the last twelve months, from ₹3.6b to ₹5.0b , which includes long-term debt. With this increase in debt, EIHOTEL currently has ₹1.6b remaining in cash and short-term investments for investing into the business. On top of this, EIHOTEL has generated ₹2.7b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 54%, meaning that EIHOTEL’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 EIHOTEL’s case, it is able to generate 0.54x cash from its debt capital.
Can EIHOTEL pay its short-term liabilities?
Looking at EIHOTEL’s ₹5.8b in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹5.8b, with a current ratio of 1.01x. Generally, for Hospitality companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does EIHOTEL face the risk of succumbing to its debt-load?
EIHOTEL’s level of debt is appropriate relative to its total equity, at 17%. EIHOTEL is not taking on too much debt commitment, which may be constraining for future growth.
Next Steps:
EIHOTEL’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, 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 EIHOTEL has company-specific issues impacting its capital structure decisions. I suggest you continue to research EIH to get a better picture of the stock by looking at: