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Investors are always looking for growth in small-cap stocks like Shoppers Stop Limited (NSE:SHOPERSTOP), with a market cap of ₹49.40b. However, an important fact which most ignore is: how financially healthy is the business? Multiline Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SHOPERSTOP here.
Does SHOPERSTOP produce enough cash relative to debt?
Over the past year, SHOPERSTOP has reduced its debt from ₹8.85b to ₹1.25b , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at ₹253.8m , ready to deploy into the business. Moreover, SHOPERSTOP has produced cash from operations of ₹2.98b in the last twelve months, leading to an operating cash to total debt ratio of 238%, signalling that SHOPERSTOP’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SHOPERSTOP’s case, it is able to generate 2.38x cash from its debt capital.
Does SHOPERSTOP’s liquid assets cover its short-term commitments?
Looking at SHOPERSTOP’s most recent ₹8.39b liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.71x.
Can SHOPERSTOP service its debt comfortably?
SHOPERSTOP’s level of debt is appropriate relative to its total equity, at 13.9%. SHOPERSTOP is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if SHOPERSTOP’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 SHOPERSTOP, the ratio of 5.09x 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:
SHOPERSTOP has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But it is still important for shareholders to understand why the company isn’t increasing its cheaper cost of capital to fund future growth, especially when liquidity may also be an issue. Keep in mind I haven’t considered other factors such as how SHOPERSTOP has been performing in the past. I suggest you continue to research Shoppers Stop to get a better picture of the stock by looking at: