While small-cap stocks, such as Signet Industries Limited (NSEI:SIGNETIND) with its market cap of IN₨2.57B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SIGNETIND here.
How does SIGNETIND’s operating cash flow stack up against its debt?
Over the past year, SIGNETIND has maintained its debt levels at around IN₨1.97B – this includes both the current and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at IN₨277.02M , ready to deploy into the business. Additionally, SIGNETIND has generated IN₨147.38M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 7.47%, meaning that SIGNETIND’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SIGNETIND’s case, it is able to generate 0.075x cash from its debt capital.
Can SIGNETIND meet its short-term obligations with the cash in hand?
Looking at SIGNETIND’s most recent IN₨3.91B liabilities, it appears that the company has been able to meet these commitments with a current assets level of IN₨5.07B, leading to a 1.3x current account ratio. Usually, for Trade Distributors companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SIGNETIND service its debt comfortably?
SIGNETIND is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether SIGNETIND 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 SIGNETIND’s, case, the ratio of 1.87x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.