What does Thejo Engineering Limited's (NSE:THEJO) Balance Sheet Tell Us About Its Future?

Investors are always looking for growth in small-cap stocks like Thejo Engineering Limited (NSE:THEJO), with a market cap of ₹2.1b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about 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. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into THEJO here.

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

Over the past year, THEJO has reduced its debt from ₹413m to ₹334m – this includes long-term debt. With this reduction in debt, THEJO's cash and short-term investments stands at ₹101m for investing into the business. Moreover, THEJO has produced cash from operations of ₹221m during the same period of time, resulting in an operating cash to total debt ratio of 66%, signalling that THEJO’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 THEJO’s case, it is able to generate 0.66x cash from its debt capital.

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

At the current liabilities level of ₹715m, it seems that the business has been able to meet these obligations given the level of current assets of ₹1.1b, with a current ratio of 1.57x. Usually, for Machinery companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can THEJO service its debt comfortably?

THEJO is a relatively highly levered company with a debt-to-equity of 48%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether THEJO is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In THEJO's, case, the ratio of 5.46x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving THEJO ample headroom to grow its debt facilities.

Next Steps:

Although THEJO’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. Keep in mind I haven't considered other factors such as how THEJO has been performing in the past. I suggest you continue to research Thejo Engineering to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for THEJO’s future growth? Take a look at our free research report of analyst consensus for THEJO’s outlook.
2. Valuation: What is THEJO 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 THEJO 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.

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 editorial-team@simplywallst.com.

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.