While small-cap stocks, such as Shanti Overseas (India) Limited (NSEI:SHANTI) with its market cap of ₹280.98M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis 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. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into SHANTI here.
Does SHANTI generate an acceptable amount of cash through operations?
SHANTI’s debt level has been constant at around ₹247.70M over the previous year – this includes both the current and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at ₹13.89M , ready to deploy into the business. Moreover, SHANTI has generated cash from operations of ₹428.87M in the last twelve months, leading to an operating cash to total debt ratio of 173.14%, meaning that SHANTI’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SHANTI’s case, it is able to generate 1.73x cash from its debt capital.
Does SHANTI’s liquid assets cover its short-term commitments?
Looking at SHANTI’s most recent ₹239.78M liabilities, it seems that the business has been able to meet these commitments with a current assets level of ₹285.05M, leading to a 1.19x current account ratio. Usually, for Food companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does SHANTI face the risk of succumbing to its debt-load?
SHANTI is a highly-leveraged company with debt exceeding equity by over 100%. 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 SHANTI’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 SHANTI, the ratio of 2.59x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SHANTI’s low interest coverage already puts the company at higher risk of default.
Next Steps:
SHANTI’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around SHANTI’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how SHANTI has been performing in the past. I suggest you continue to research Shanti Overseas (India) to get a more holistic view of the small-cap by looking at: