Investors are always looking for growth in small-cap stocks like Debock Sales and Marketing Limited (NSEI:DSML), with a market cap of ₹160.70M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, 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. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into DSML here.

Does DSML generate an acceptable amount of cash through operations?

Over the past year, DSML has ramped up its debt from ₹152.29M to ₹200.25M , which is made up of current and long term debt. With this growth in debt, DSML currently has ₹1.03M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of DSML’s operating efficiency ratios such as ROA here.

Does DSML’s liquid assets cover its short-term commitments?

Looking at DSML’s most recent ₹229.90M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.91x, which is below the prudent industry ratio of 3x.

Is DSML’s debt level acceptable?

Since total debt levels have outpaced equities, DSML is a highly leveraged 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 check to see whether DSML is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In DSML’s, case, the ratio of 1.99x 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:

DSML’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for DSML’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Debock Sales and Marketing to get a more holistic view of the stock by looking at: