Nagarjuna Fertilizers and Chemicals Limited (NSEI:NAGARFERT) is a small-cap stock with a market capitalization of ₹8.94B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that NAGARFERT is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into NAGARFERT here.
How does NAGARFERT’s operating cash flow stack up against its debt?
Over the past year, NAGARFERT has maintained its debt levels at around ₹17.19B comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at ₹1.14B , ready to deploy into the business. Moreover, NAGARFERT has produced ₹3.60B in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 20.92%, signalling that NAGARFERT’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In NAGARFERT’s case, it is able to generate 0.21x cash from its debt capital.
Can NAGARFERT meet its short-term obligations with the cash in hand?
With current liabilities at ₹21.58B, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.73x, which is below the prudent industry ratio of 3x.
Does NAGARFERT face the risk of succumbing to its debt-load?
With total debt exceeding equities, NAGARFERT is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since NAGARFERT is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
NAGARFERT’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how NAGARFERT has been performing in the past. You should continue to research Nagarjuna Fertilizers and Chemicals to get a better picture of the stock by looking at: