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While small-cap stocks, such as McLeod Russel India Limited (NSE:MCLEODRUSS) with its market cap of ₹3.5b, 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 vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into MCLEODRUSS here.
MCLEODRUSS’s Debt (And Cash Flows)
MCLEODRUSS has built up its total debt levels in the last twelve months, from ₹9.4b to ₹11b – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at ₹760m , ready to be used for running the business. On top of this, MCLEODRUSS has produced ₹2.2b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 20%, indicating that MCLEODRUSS’s current level of operating cash is not high enough to cover debt.
Does MCLEODRUSS’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹10b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Food companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does MCLEODRUSS face the risk of succumbing to its debt-load?
MCLEODRUSS is a relatively highly levered company with a debt-to-equity of 50%. 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 MCLEODRUSS’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 MCLEODRUSS, the ratio of 1.69x 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:
Although MCLEODRUSS’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. Keep in mind I haven't considered other factors such as how MCLEODRUSS has been performing in the past. You should continue to research McLeod Russel India to get a more holistic view of the small-cap by looking at: