Investors are always looking for growth in small-cap stocks like KDDL Limited (NSEI:KDDL), with a market cap of ₹3.70B. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into KDDL here.

Does KDDL generate enough cash through operations?

Over the past year, KDDL has maintained its debt levels at around ₹1,136.9M made up of current and long term debt. At this current level of debt, KDDL’s cash and short-term investments stands at ₹210.5M , ready to deploy into the business. On top of this, KDDL has produced cash from operations of ₹217.2M over the same time period, leading to an operating cash to total debt ratio of 19.11%, meaning that KDDL’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KDDL’s case, it is able to generate 0.19x cash from its debt capital.

Can KDDL pay its short-term liabilities?

At the current liabilities level of ₹1,738.6M liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹2,497.9M, leading to a 1.44x current account ratio. For luxury companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can KDDL service its debt comfortably?

With a debt-to-equity ratio of 77.14%, KDDL can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if KDDL’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 KDDL, the ratio of 1.51x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as KDDL’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Are you a shareholder? At its current level of cash flow coverage, KDDL has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. You should always be keeping on top of market expectations for KDDL’s future growth on our free analysis platform.

Are you a potential investor? Though short-term liquidity isn’t an issue, KDDL’s high debt levels on top of low cash coverage of debt may not be what you’re after in an investment. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of KDDL’s track record. As a following step, you should take a look at KDDL’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.