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Investors are always looking for growth in small-cap stocks like MT Educare Limited (NSEI:MTEDUCARE), with a market cap of ₹4.20B. However, an important fact which most ignore is: how financially healthy is the business? Since MTEDUCARE is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into MTEDUCARE here.
Does MTEDUCARE generate an acceptable amount of cash through operations?
MTEDUCARE’s debt levels surged from ₹349.90M to ₹1.44B over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at ₹164.81M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of MTEDUCARE’s operating efficiency ratios such as ROA here.
Can MTEDUCARE meet its short-term obligations with the cash in hand?
With current liabilities at ₹2.02B, it seems that the business is not able to meet these obligations given the level of current assets of ₹1.77B, with a current ratio of 0.88x below the prudent level of 3x.
Can MTEDUCARE service its debt comfortably?
MTEDUCARE is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since MTEDUCARE is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
With a high level of debt on its balance sheet, MTEDUCARE 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 MTEDUCARE to increase its operational efficiency. 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 MTEDUCARE has been performing in the past. I suggest you continue to research MT Educare to get a better picture of the stock by looking at: