While small-cap stocks, such as Milton Industries Limited (NSEI:MILTON) with its market cap of ₹472.77M, 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. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into MILTON here.
Does MILTON generate an acceptable amount of cash through operations?
Over the past year, MILTON has reduced its debt from ₹235.8M to ₹210.3M – this includes both the current and long-term debt. With this debt repayment, MILTON currently has ₹7.3M remaining in cash and short-term investments , ready to deploy into the business. Additionally, MILTON has produced ₹34.0M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.16x, signalling that MILTON’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MILTON’s case, it is able to generate 0.16x cash from its debt capital.
Can MILTON meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹332.4M liabilities, the company has been able to meet these obligations given the level of current assets of ₹427.3M, with a current ratio of 1.29x. For paper and forest products companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can MILTON service its debt comfortably?
With total debt exceeding equities, MILTON is considered a highly levered 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 test if MILTON’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 MILTON, the ratio of 1.53x 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:
Are you a shareholder? MILTON’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. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that MILTON’s financial situation may change. You should always be keeping on top of market expectations for MILTON’s future growth on our free analysis platform.