Investors are always looking for growth in small-cap stocks like Mahickra Chemicals Limited (NSE:MAHICKRA), with a market cap of ₹333.9m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis 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. However, this commentary is still very high-level, so I suggest you dig deeper yourself into MAHICKRA here.
How does MAHICKRA’s operating cash flow stack up against its debt?
MAHICKRA’s debt level has been constant at around ₹63.4m over the previous year comprising of short- and long-term debt. At this constant level of debt, MAHICKRA’s cash and short-term investments stands at ₹12.7m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of MAHICKRA’s operating efficiency ratios such as ROA here.
Can MAHICKRA meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹262.6m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹337.4m, with a current ratio of 1.28x. Usually, for Chemicals companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is MAHICKRA’s debt level acceptable?
With a debt-to-equity ratio of 81.5%, MAHICKRA can be considered as an above-average 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 MAHICKRA 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 MAHICKRA’s, case, the ratio of 5.65x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as MAHICKRA’s high interest coverage is seen as responsible and safe practice.
Next Steps:
MAHICKRA’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 an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure MAHICKRA has company-specific issues impacting its capital structure decisions. I suggest you continue to research Mahickra Chemicals to get a more holistic view of the stock by looking at: