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While small-cap stocks, such as Techno Electric & Engineering Company Limited (NSE:TECHNO) with its market cap of ₹31.65b, 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 vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into TECHNO here.
How does TECHNO’s operating cash flow stack up against its debt?
TECHNO’s debt levels have fallen from ₹3.03b to ₹766.98m over the last 12 months , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at ₹4.25b , ready to deploy 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. 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 TECHNO’s operating efficiency ratios such as ROA here.
Can TECHNO pay its short-term liabilities?
At the current liabilities level of ₹5.40b liabilities, it seems that the business has been able to meet these commitments with a current assets level of ₹12.36b, leading to a 2.29x current account ratio. Generally, for Construction companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is TECHNO’s debt level acceptable?
With debt at 6.13% of equity, TECHNO may be thought of as having low leverage. This range is considered safe as TECHNO is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether TECHNO 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 TECHNO’s, case, the ratio of 10.69x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as TECHNO’s high interest coverage is seen as responsible and safe practice.
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TECHNO’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for TECHNO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Techno Electric & Engineering to get a better picture of the stock by looking at: