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Investors are always looking for growth in small-cap stocks like Reliable Data Services Limited (NSE:RELIABLE), with a market cap of ₹454m. However, an important fact which most ignore is: how financially healthy is the business? IT companies, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into RELIABLE here.
How does RELIABLE’s operating cash flow stack up against its debt?
RELIABLE’s debt level has been constant at around ₹86m over the previous year which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at ₹103m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of RELIABLE’s operating efficiency ratios such as ROA here.
Can RELIABLE pay its short-term liabilities?
Looking at RELIABLE’s ₹209m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.88x. Generally, for IT companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does RELIABLE face the risk of succumbing to its debt-load?
With debt at 28% of equity, RELIABLE may be thought of as appropriately levered. This range is considered safe as RELIABLE is not taking on too much debt obligation, which may be constraining for future growth. We can test if RELIABLE’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 RELIABLE, the ratio of 7.57x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving RELIABLE ample headroom to grow its debt facilities.
Next Steps:
RELIABLE’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure RELIABLE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Reliable Data Services to get a more holistic view of the stock by looking at: