Investors are always looking for growth in small-cap stocks like NCC Limited (NSEI:NCC), with a market cap of ₹80.22B. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I recommend you dig deeper yourself into NCC here.
Does NCC generate an acceptable amount of cash through operations?
Over the past year, NCC has reduced its debt from ₹32.08B to ₹25.72B – this includes both the current and long-term debt. With this reduction in debt, NCC currently has ₹5.65B remaining in cash and short-term investments for investing into the business. On top of this, NCC has generated cash from operations of ₹3.14B during the same period of time, leading to an operating cash to total debt ratio of 12.19%, meaning that NCC’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NCC’s case, it is able to generate 0.12x cash from its debt capital.
Can NCC pay its short-term liabilities?
Looking at NCC’s most recent ₹65.68B liabilities, the company has been able to meet these obligations given the level of current assets of ₹88.33B, with a current ratio of 1.34x. Generally, for Construction companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does NCC face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 68.11%, NCC can be considered as an above-average 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 NCC’s case, the ratio of 1.47x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
At its current level of cash flow coverage, NCC has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for NCC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research NCC to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NCC’s future growth? Take a look at our free research report of analyst consensus for NCC’s outlook.
- Valuation: What is NCC 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 NCC 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.