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While small-cap stocks, such as Pincon Spirit Limited (NSEI:PINCON) with its market cap of IN₨1.50B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into PINCON here.
Does PINCON generate an acceptable amount of cash through operations?
PINCON’s debt levels surged from IN₨2.54B to IN₨2.97B over the last 12 months , which is made up of current and long term debt. With this growth in debt, PINCON’s cash and short-term investments stands at IN₨5.12M for investing into the business. On top of this, PINCON has produced cash from operations of IN₨44.87M during the same period of time, resulting in an operating cash to total debt ratio of 1.51%, indicating that PINCON’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 PINCON’s case, it is able to generate 0.015x cash from its debt capital.
Can PINCON meet its short-term obligations with the cash in hand?
With current liabilities at IN₨3.40B, it seems that the business has been able to meet these obligations given the level of current assets of IN₨4.77B, with a current ratio of 1.4x. Generally, for Beverage 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 PINCON’s debt level acceptable?
With total debt exceeding equities, PINCON is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if PINCON’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For PINCON, the ratio of 3.74x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
PINCON’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how PINCON has been performing in the past. I suggest you continue to research Pincon Spirit to get a better picture of the stock by looking at: