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While small-cap stocks, such as KNR Constructions Limited (NSE:KNRCON) with its market cap of ₹25.21b, 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into KNRCON here.
Does KNRCON produce enough cash relative to debt?
Over the past year, KNRCON has ramped up its debt from ₹7.21b to ₹7.70b , which is made up of current and long term debt. With this rise in debt, KNRCON currently has ₹625.4m remaining in cash and short-term investments for investing into the business. Additionally, KNRCON has generated cash from operations of ₹2.20b in the last twelve months, leading to an operating cash to total debt ratio of 28.5%, meaning that KNRCON’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In KNRCON’s case, it is able to generate 0.28x cash from its debt capital.
Can KNRCON pay its short-term liabilities?
Looking at KNRCON’s most recent ₹7.29b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of ₹9.87b, with a current ratio of 1.35x. Generally, for Construction companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can KNRCON service its debt comfortably?
With debt reaching 70.2% of equity, KNRCON may be thought of as relatively highly levered. 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 KNRCON 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 KNRCON’s, case, the ratio of 6.06x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although KNRCON’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how KNRCON has been performing in the past. You should continue to research KNR Constructions to get a more holistic view of the small-cap by looking at: