Tirupati Forge Limited (NSEI:FORGE) is a small-cap stock with a market capitalization of ₹390.86M. 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 vital, 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. However, this commentary is still very high-level, so I suggest you dig deeper yourself into FORGE here.
How does FORGE’s operating cash flow stack up against its debt?
FORGE’s debt levels have fallen from ₹51.8M to ₹44.2M over the last 12 months , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at ₹1.0M , ready to deploy into the business. Additionally, FORGE has produced ₹15.6M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 0.35x, indicating that FORGE’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FORGE’s case, it is able to generate 0.35x cash from its debt capital.
Can FORGE pay its short-term liabilities?
With current liabilities at ₹50.7M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.06x. Usually, for metals and mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is FORGE’s level of debt at an acceptable level?
Since total debt levels have outpaced equities, FORGE is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In FORGE’s case, the ratio of 2.3x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.