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Indo National Limited (NSE:NIPPOBATRY) is a small-cap stock with a market capitalization of ₹2.4b. 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? So, understanding the company’s financial health becomes essential, 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. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into NIPPOBATRY here.
Does NIPPOBATRY produce enough cash relative to debt?
Over the past year, NIPPOBATRY has ramped up its debt from ₹492m to ₹651m , which comprises of short- and long-term debt. With this increase in debt, NIPPOBATRY currently has ₹199m remaining in cash and short-term investments for investing into the business. Moreover, NIPPOBATRY has generated cash from operations of ₹408m in the last twelve months, resulting in an operating cash to total debt ratio of 63%, signalling that NIPPOBATRY’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NIPPOBATRY’s case, it is able to generate 0.63x cash from its debt capital.
Can NIPPOBATRY meet its short-term obligations with the cash in hand?
Looking at NIPPOBATRY’s most recent ₹1.8b liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹2.4b, with a current ratio of 1.37x. For Electrical companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is NIPPOBATRY’s debt level acceptable?
With debt at 29% of equity, NIPPOBATRY may be thought of as appropriately levered. This range is considered safe as NIPPOBATRY is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
Next Steps:
NIPPOBATRY’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how NIPPOBATRY has been performing in the past. I recommend you continue to research Indo National to get a better picture of the stock by looking at: