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Investors are always looking for growth in small-cap stocks like Mukta Arts Limited (NSEI:MUKTAARTS), with a market cap of ₹1.30B. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into MUKTAARTS here.
Does MUKTAARTS generate an acceptable amount of cash through operations?
MUKTAARTS has built up its total debt levels in the last twelve months, from ₹840.20M to ₹901.99M – this includes both the current and long-term debt. With this rise in debt, MUKTAARTS’s cash and short-term investments stands at ₹35.86M , ready to deploy into the business. Moreover, MUKTAARTS has generated cash from operations of ₹43.49M in the last twelve months, resulting in an operating cash to total debt ratio of 4.82%, meaning that MUKTAARTS’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 MUKTAARTS’s case, it is able to generate 0.048x cash from its debt capital.
Can MUKTAARTS meet its short-term obligations with the cash in hand?
With current liabilities at ₹926.65M, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.66x, which is below the prudent industry ratio of 3x.
Does MUKTAARTS face the risk of succumbing to its debt-load?
MUKTAARTS is a relatively highly levered company with a debt-to-equity of 40.15%. 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 MUKTAARTS’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 MUKTAARTS, the ratio of 0.25x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
MUKTAARTS’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how MUKTAARTS has been performing in the past. I recommend you continue to research Mukta Arts to get a more holistic view of the stock by looking at: