While small-cap stocks, such as Madhya Bharat Agro Products Limited (NSE:MBAPL) with its market cap of ₹964m, 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. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into MBAPL here.
How much cash does MBAPL generate through its operations?
Over the past year, MBAPL has ramped up its debt from ₹336m to ₹357m , which is made up of current and long term debt. With this growth in debt, MBAPL’s cash and short-term investments stands at ₹202k , ready to deploy into the business. Moreover, MBAPL has produced cash from operations of ₹192m in the last twelve months, resulting in an operating cash to total debt ratio of 54%, signalling that MBAPL’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 MBAPL’s case, it is able to generate 0.54x cash from its debt capital.
Can MBAPL meet its short-term obligations with the cash in hand?
Looking at MBAPL’s most recent ₹276m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹388m, with a current ratio of 1.41x. Usually, for Chemicals companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can MBAPL service its debt comfortably?
With a debt-to-equity ratio of 34%, MBAPL’s debt level may be seen as prudent. MBAPL is not taking on too much debt commitment, which may be constraining for future growth. We can test if MBAPL’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 MBAPL, the ratio of 2.51x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
MBAPL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure MBAPL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Madhya Bharat Agro Products to get a more holistic view of the stock by looking at: