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Investors are always looking for growth in small-cap stocks like Gujarat Sidhee Cement Limited (NSE:GSCLCEMENT), with a market cap of ₹2.0b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into GSCLCEMENT here.
How does GSCLCEMENT’s operating cash flow stack up against its debt?
Over the past year, GSCLCEMENT has ramped up its debt from ₹344m to ₹478m – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at ₹96m , ready to deploy into the business. On top of this, GSCLCEMENT has generated cash from operations of ₹358m in the last twelve months, leading to an operating cash to total debt ratio of 75%, meaning that GSCLCEMENT’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GSCLCEMENT’s case, it is able to generate 0.75x cash from its debt capital.
Can GSCLCEMENT pay its short-term liabilities?
At the current liabilities level of ₹1.6b liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.66x.
Is GSCLCEMENT’s debt level acceptable?
GSCLCEMENT’s level of debt is appropriate relative to its total equity, at 12%. This range is considered safe as GSCLCEMENT is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether GSCLCEMENT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In GSCLCEMENT’s, case, the ratio of 252x suggests that interest is comfortably 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:
GSCLCEMENT’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially if meeting short-term obligations could also bring about issues. I admit this is a fairly basic analysis for GSCLCEMENT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Gujarat Sidhee Cement to get a more holistic view of the stock by looking at: