Investors are always looking for growth in small-cap stocks like Five Core Electronics Limited (NSE:FIVECORE), with a market cap of ₹1.4b. However, an important fact which most ignore is: how financially healthy is the business? Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into FIVECORE here.

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

FIVECORE has built up its total debt levels in the last twelve months, from ₹377m to ₹534m – this includes long-term debt. With this rise in debt, FIVECORE currently has ₹235m remaining in cash and short-term investments for investing into the business. On top of this, FIVECORE has produced cash from operations of ₹202m during the same period of time, resulting in an operating cash to total debt ratio of 38%, indicating that FIVECORE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FIVECORE’s case, it is able to generate 0.38x cash from its debt capital.

Can FIVECORE pay its short-term liabilities?

With current liabilities at ₹680m, it seems that the business has been able to meet these obligations given the level of current assets of ₹1.3b, with a current ratio of 1.87x. Generally, for Consumer Durables companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

Can FIVECORE service its debt comfortably?

FIVECORE is a relatively highly levered company with a debt-to-equity of 79%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 FIVECORE’s case, the ratio of 4.2x 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:

Although FIVECORE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure FIVECORE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Five Core Electronics to get a better picture of the small-cap by looking at: