Investors are always looking for growth in small-cap stocks like Magadh Sugar & Energy Limited (NSEI:MAGADHSUGAR), with a market cap of IN₨1.64B. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into MAGADHSUGAR here.
How does MAGADHSUGAR’s operating cash flow stack up against its debt?
Over the past year, MAGADHSUGAR has borrowed debt capital of around IN₨4.88B comprising of short- and long-term debt. With this increase in debt, MAGADHSUGAR’s cash and short-term investments stands at IN₨14.53M for investing into the business. Additionally, MAGADHSUGAR has produced IN₨623.96M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 12.79%, indicating that MAGADHSUGAR’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MAGADHSUGAR’s case, it is able to generate 0.13x cash from its debt capital.
Can MAGADHSUGAR pay its short-term liabilities?
With current liabilities at IN₨5.26B, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.88x, which is below the prudent industry ratio of 3x.
Does MAGADHSUGAR face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 76.15%, MAGADHSUGAR can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MAGADHSUGAR 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 MAGADHSUGAR’s, case, the ratio of 2.33x 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.
Next Steps:
MAGADHSUGAR’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for MAGADHSUGAR’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Magadh Sugar & Energy to get a better picture of the stock by looking at: