While small-cap stocks, such as Perfect Infraengineers Limited (NSE:PERFECT) with its market cap of ₹137.9m, 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, since poor capital management may bring about 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into PERFECT here.
Does PERFECT produce enough cash relative to debt?
PERFECT’s debt levels surged from ₹124.4m to ₹135.1m over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, PERFECT currently has ₹10.0m remaining in cash and short-term investments for investing into the business. Additionally, PERFECT has generated cash from operations of ₹5.4m in the last twelve months, leading to an operating cash to total debt ratio of 4.0%, meaning that PERFECT’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PERFECT’s case, it is able to generate 0.04x cash from its debt capital.
Can PERFECT meet its short-term obligations with the cash in hand?
With current liabilities at ₹162.3m, it seems that the business has been able to meet these commitments with a current assets level of ₹245.1m, leading to a 1.51x current account ratio. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does PERFECT face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 74.5%, PERFECT can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 PERFECT’s case, the ratio of 1.08x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
PERFECT’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 will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for PERFECT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Perfect Infraengineers to get a better picture of the stock by looking at: