While small-cap stocks, such as Linde India Limited (NSEI:LINDEINDIA) with its market cap of ₹40.52B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into LINDEINDIA here.

Does LINDEINDIA generate enough cash through operations?

LINDEINDIA has sustained its debt level by about ₹14.45B over the last 12 months made up of current and long term debt. At this current level of debt, LINDEINDIA currently has ₹1.08B remaining in cash and short-term investments for investing into the business. Moreover, LINDEINDIA has produced cash from operations of ₹2.98B during the same period of time, resulting in an operating cash to total debt ratio of 20.59%, meaning that LINDEINDIA’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LINDEINDIA’s case, it is able to generate 0.21x cash from its debt capital.

Can LINDEINDIA pay its short-term liabilities?

With current liabilities at ₹9.60B, it seems that the business has not been able to meet these commitments with a current assets level of ₹7.42B, leading to a 0.77x current account ratio. which is under the appropriate industry ratio of 3x.

Can LINDEINDIA service its debt comfortably?

Since total debt levels have outpaced equities, LINDEINDIA 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 test if LINDEINDIA’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 LINDEINDIA, the ratio of 0.95x 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:

With a high level of debt on its balance sheet, LINDEINDIA could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for LINDEINDIA to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure LINDEINDIA has company-specific issues impacting its capital structure decisions. You should continue to research Linde India to get a more holistic view of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.