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The Peria Karamalai Tea and Produce Company Limited (NSE:PKTEA) is a small-cap stock with a market capitalization of ₹721.0m. 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? Evaluating financial health as part of your investment thesis is crucial, 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. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PKTEA here.
Does PKTEA produce enough cash relative to debt?
Over the past year, PKTEA has ramped up its debt from ₹73.7m to ₹221.3m – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹23.0m , ready to deploy into the business. On top of this, PKTEA has produced ₹63.2m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 28.6%, indicating that PKTEA’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 PKTEA’s case, it is able to generate 0.29x cash from its debt capital.
Does PKTEA’s liquid assets cover its short-term commitments?
With current liabilities at ₹160.5m, the company has been able to meet these commitments with a current assets level of ₹191.7m, leading to a 1.19x current account ratio. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does PKTEA face the risk of succumbing to its debt-load?
PKTEA’s level of debt is appropriate relative to its total equity, at 16.5%. This range is considered safe as PKTEA is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether PKTEA 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 PKTEA’s, case, the ratio of 1.43x 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.