While small-cap stocks, such as GRP Limited (NSE:GRPLTD) with its market cap of ₹1.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since GRPLTD is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. 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 GRPLTD here.
How does GRPLTD’s operating cash flow stack up against its debt?
Over the past year, GRPLTD has reduced its debt from ₹668m to ₹572m , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at ₹9.4m for investing into the business. Moreover, GRPLTD has produced cash from operations of ₹219m during the same period of time, resulting in an operating cash to total debt ratio of 38%, signalling that GRPLTD’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In GRPLTD’s case, it is able to generate 0.38x cash from its debt capital.
Can GRPLTD meet its short-term obligations with the cash in hand?
With current liabilities at ₹774m, it appears that the company has been able to meet these commitments with a current assets level of ₹965m, leading to a 1.25x current account ratio. Generally, for Auto Components companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can GRPLTD service its debt comfortably?
With a debt-to-equity ratio of 46%, GRPLTD can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since GRPLTD is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although GRPLTD’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure GRPLTD has company-specific issues impacting its capital structure decisions. You should continue to research GRP to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GRPLTD’s future growth? Take a look at our free research report of analyst consensus for GRPLTD’s outlook.
- Valuation: What is GRPLTD worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GRPLTD is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.