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While small-cap stocks, such as KEI Industries Limited (NSE:KEI) with its market cap of ₹26.36b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is 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 KEI here.
Does KEI produce enough cash relative to debt?
Over the past year, KEI has maintained its debt levels at around ₹8.42b made up of current and long term debt. At this constant level of debt, KEI currently has ₹682.8m remaining in cash and short-term investments for investing into the business. On top of this, KEI has generated ₹1.91b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 22.6%, signalling that KEI’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 KEI’s case, it is able to generate 0.23x cash from its debt capital.
Can KEI pay its short-term liabilities?
At the current liabilities level of ₹14.23b liabilities, the company has been able to meet these obligations given the level of current assets of ₹17.71b, with a current ratio of 1.24x. Generally, for Electrical companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can KEI service its debt comfortably?
Since total debt levels have outpaced equities, KEI is a highly 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 check to see whether KEI 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 KEI’s, case, the ratio of 3.51x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving KEI ample headroom to grow its debt facilities.
Next Steps:
KEI’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for KEI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research KEI Industries to get a better picture of the stock by looking at: