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Zodiac Clothing Company Limited (NSE:ZODIACLOTH) is a small-cap stock with a market capitalization of ₹3.1b. 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? Since ZODIACLOTH is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ZODIACLOTH here.
How does ZODIACLOTH’s operating cash flow stack up against its debt?
ZODIACLOTH has built up its total debt levels in the last twelve months, from ₹592m to ₹669m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at ₹199m , 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 take a look at some of ZODIACLOTH’s operating efficiency ratios such as ROA here.
Does ZODIACLOTH’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹1.2b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.63x. Generally, for Luxury companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is ZODIACLOTH’s debt level acceptable?
ZODIACLOTH’s level of debt is appropriate relative to its total equity, at 23%. This range is considered safe as ZODIACLOTH is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. ZODIACLOTH’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
ZODIACLOTH’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure ZODIACLOTH has company-specific issues impacting its capital structure decisions. I suggest you continue to research Zodiac Clothing to get a better picture of the stock by looking at: