While small-cap stocks, such as Maheshwari Logistics Limited (NSE:MAHESHWARI) with its market cap of ₹2.78b, 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, since poor capital management may bring about 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 suggest you dig deeper yourself into MAHESHWARI here.
How much cash does MAHESHWARI generate through its operations?
Over the past year, MAHESHWARI has ramped up its debt from ₹737.1m to ₹1.30b , which comprises of short- and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at ₹127.7m , ready to deploy into the business. Additionally, MAHESHWARI has produced ₹22.2m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 1.7%, signalling that MAHESHWARI’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MAHESHWARI’s case, it is able to generate 0.017x cash from its debt capital.
Can MAHESHWARI pay its short-term liabilities?
At the current liabilities level of ₹1.68b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.53x. Usually, for Transportation companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does MAHESHWARI face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, MAHESHWARI is a highly 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 MAHESHWARI 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 MAHESHWARI’s, case, the ratio of 3.42x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MAHESHWARI ample headroom to grow its debt facilities.
Next Steps:
MAHESHWARI’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure MAHESHWARI has company-specific issues impacting its capital structure decisions. I recommend you continue to research Maheshwari Logistics to get a better picture of the stock by looking at: