How Financially Strong Is Mahindra CIE Automotive Limited (NSE:MAHINDCIE)?

Mahindra CIE Automotive Limited (NSEI:MAHINDCIE) is a small-cap stock with a market capitalization of ₹84.02B. 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. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into MAHINDCIE here.

How does MAHINDCIE’s operating cash flow stack up against its debt?

MAHINDCIE's debt levels have fallen from ₹13.92B to ₹11.97B over the last 12 months – this includes both the current and long-term debt. With this debt repayment, MAHINDCIE currently has ₹1.21B remaining in cash and short-term investments for investing into the business. On top of this, MAHINDCIE has produced cash from operations of ₹5.12B in the last twelve months, leading to an operating cash to total debt ratio of 42.79%, meaning that MAHINDCIE’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MAHINDCIE’s case, it is able to generate 0.43x cash from its debt capital.

Can MAHINDCIE meet its short-term obligations with the cash in hand?

With current liabilities at ₹23.48B, it appears that the company is not able to meet these obligations given the level of current assets of ₹21.20B, with a current ratio of 0.9x below the prudent level of 3x.

Can MAHINDCIE service its debt comfortably?

With debt at 32.21% of equity, MAHINDCIE may be thought of as appropriately levered. This range is considered safe as MAHINDCIE is not taking on too much debt obligation, which may be constraining for future growth. We can test if MAHINDCIE’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 MAHINDCIE, the ratio of 18.92x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MAHINDCIE’s high interest coverage is seen as responsible and safe practice.

Next Steps:

MAHINDCIE’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure MAHINDCIE has company-specific issues impacting its capital structure decisions. You should continue to research Mahindra CIE Automotive to get a better picture of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for MAHINDCIE’s future growth? Take a look at our free research report of analyst consensus for MAHINDCIE’s outlook.
• 2. Valuation: What is MAHINDCIE 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 MAHINDCIE is currently mispriced by the market.
• 3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.