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While small-cap stocks, such as ITD Cementation India Limited (NSE:ITDCEM) with its market cap of ₹20.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, 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. However, this commentary is still very high-level, so I recommend you dig deeper yourself into ITDCEM here.
How much cash does ITDCEM generate through its operations?
ITDCEM has sustained its debt level by about ₹4.7b over the last 12 months comprising of short- and long-term debt. At this current level of debt, ITDCEM’s cash and short-term investments stands at ₹1.3b , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of ITDCEM’s operating efficiency ratios such as ROA here.
Can ITDCEM meet its short-term obligations with the cash in hand?
With current liabilities at ₹16.1b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.21x. For Construction companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can ITDCEM service its debt comfortably?
With a debt-to-equity ratio of 47%, ITDCEM can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if ITDCEM’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For ITDCEM, the ratio of 5.95x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ITDCEM ample headroom to grow its debt facilities.
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ITDCEM’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for ITDCEM’s financial health. Other important fundamentals need to be considered alongside. You should continue to research ITD Cementation India to get a more holistic view of the stock by looking at: