While small-cap stocks, such as Tata Coffee Limited (NSE:TATACOFFEE) with its market cap of ₹22.30b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into TATACOFFEE here.

Does TATACOFFEE produce enough cash relative to debt?

Over the past year, TATACOFFEE has ramped up its debt from ₹7.80b to ₹9.90b , which comprises of short- and long-term debt. With this growth in debt, TATACOFFEE currently has ₹1.35b remaining in cash and short-term investments for investing into the business. Additionally, TATACOFFEE has produced ₹1.24b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 12.56%, indicating that TATACOFFEE’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TATACOFFEE’s case, it is able to generate 0.13x cash from its debt capital.

Can TATACOFFEE meet its short-term obligations with the cash in hand?

Looking at TATACOFFEE’s most recent ₹4.32b liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹7.68b, leading to a 1.78x current account ratio. For Food companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

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

With a debt-to-equity ratio of 67.36%, TATACOFFEE can be considered as an above-average leveraged company. 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 TATACOFFEE’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 TATACOFFEE, the ratio of 8.89x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TATACOFFEE ample headroom to grow its debt facilities.

Next Steps:

TATACOFFEE’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for TATACOFFEE’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Tata Coffee to get a better picture of the stock by looking at: