Latteys Industries Limited (NSE:LATTEYS) is a small-cap stock with a market capitalization of ₹310.25m. 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into LATTEYS here.
Does LATTEYS produce enough cash relative to debt?
LATTEYS has built up its total debt levels in the last twelve months, from ₹82.04m to ₹0 , which comprises of short- and long-term debt. With this increase in debt, LATTEYS’s cash and short-term investments stands at ₹9.02m for investing into the business. Additionally, LATTEYS has generated ₹11.85m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 12.19%, meaning that LATTEYS’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LATTEYS’s case, it is able to generate 0.12x cash from its debt capital.
Can LATTEYS meet its short-term obligations with the cash in hand?
With current liabilities at ₹196.45m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.09x. Usually, for Machinery companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can LATTEYS service its debt comfortably?LATTEYS is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 LATTEYS’s case, the ratio of 1.84x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as LATTEYS’s low interest coverage already puts the company at higher risk of default.
LATTEYS’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for LATTEYS’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Latteys Industries to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LATTEYS’s future growth? Take a look at our free research report of analyst consensus for LATTEYS’s outlook.
- Historical Performance: What has LATTEYS’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.