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Investors are always looking for growth in small-cap stocks like Man Industries (India) Limited (NSE:MANINDS), with a market cap of ₹3.9b. However, an important fact which most ignore is: how financially healthy is the business? 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. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into MANINDS here.
MANINDS’s Debt (And Cash Flows)
Over the past year, MANINDS has reduced its debt from ₹4.5b to ₹3.7b – this includes long-term debt. With this debt payback, MANINDS's cash and short-term investments stands at ₹60m , ready to be used for running the business. Additionally, MANINDS has produced cash from operations of ₹1.3b during the same period of time, resulting in an operating cash to total debt ratio of 36%, signalling that MANINDS’s current level of operating cash is high enough to cover debt.
Can MANINDS meet its short-term obligations with the cash in hand?
Looking at MANINDS’s ₹9.1b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.21x. The current ratio is the number you get when you divide current assets by current liabilities. For Construction companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MANINDS’s debt level acceptable?
MANINDS is a relatively highly levered company with a debt-to-equity of 56%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if MANINDS’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 MANINDS, the ratio of 62.54x suggests that interest is comfortably 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 MANINDS’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. I admit this is a fairly basic analysis for MANINDS's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Man Industries (India) to get a more holistic view of the small-cap by looking at: