Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Godrej Industries Limited (NSE:GODREJIND), with a market capitalization of ₹160b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at GODREJIND’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into GODREJIND here.

See our latest analysis for Godrej Industries

GODREJIND’s Debt (And Cash Flows)

GODREJIND's debt level has been constant at around ₹72b over the previous year including long-term debt. At this constant level of debt, GODREJIND currently has ₹20b remaining in cash and short-term investments , ready to be used for running the business. On top of this, GODREJIND has produced cash from operations of ₹12b during the same period of time, leading to an operating cash to total debt ratio of 17%, signalling that GODREJIND’s operating cash is less than its debt.

Can GODREJIND pay its short-term liabilities?

Looking at GODREJIND’s ₹102b in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.86x. The current ratio is the number you get when you divide current assets by current liabilities.

Does GODREJIND face the risk of succumbing to its debt-load?

With total debt exceeding equity, GODREJIND is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In GODREJIND's case, the ratio of 2.02x 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:

GODREJIND’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. I admit this is a fairly basic analysis for GODREJIND's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Godrej Industries to get a more holistic view of the stock by looking at:

1. Valuation: What is GODREJIND worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GODREJIND is currently mispriced by the market.

2. Historical Performance: What has GODREJIND's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.