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North Eastern Carrying Corporation Limited (NSE:NECCLTD) is a small-cap stock with a market capitalization of ₹455.8m. 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? 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 a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I recommend you dig deeper yourself into NECCLTD here.
How does NECCLTD’s operating cash flow stack up against its debt?
Over the past year, NECCLTD has reduced its debt from ₹833.7m to ₹537.4m – this includes both the current and long-term debt. With this debt payback, NECCLTD’s cash and short-term investments stands at ₹46.1m , ready to deploy into the business. Additionally, NECCLTD has generated ₹335.1m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 62.4%, meaning that NECCLTD’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 NECCLTD’s case, it is able to generate 0.62x cash from its debt capital.
Does NECCLTD’s liquid assets cover its short-term commitments?
Looking at NECCLTD’s most recent ₹622.3m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.1x. For Transportation companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does NECCLTD face the risk of succumbing to its debt-load?
NECCLTD is a relatively highly levered company with a debt-to-equity of 65.2%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In NECCLTD’s case, the ratio of 1.92x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as NECCLTD’s low interest coverage already puts the company at higher risk of default.