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Investors are always looking for growth in small-cap stocks like Cantabil Retail India Limited (NSEI:CANTABIL), with a market cap of ₹2.06B. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, 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, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into CANTABIL here.
Does CANTABIL generate enough cash through operations?
CANTABIL’s debt levels surged from ₹398.12M to ₹432.95M over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at ₹26.43M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of CANTABIL’s operating efficiency ratios such as ROA here.
Can CANTABIL pay its short-term liabilities?
Looking at CANTABIL’s most recent ₹701.86M liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹1.04B, leading to a 1.49x current account ratio. Usually, for Luxury companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CANTABIL face the risk of succumbing to its debt-load?
CANTABIL is a relatively highly levered company with a debt-to-equity of 40.57%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if CANTABIL’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 CANTABIL, the ratio of 1.86x 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:
CANTABIL’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, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how CANTABIL has been performing in the past. I suggest you continue to research Cantabil Retail India to get a better picture of the stock by looking at: