What Investors Should Know About Thejo Engineering Limited's (NSE:THEJO) Financial Strength

While small-cap stocks, such as Thejo Engineering Limited (NSE:THEJO) with its market cap of ₹1.9b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into THEJO here.

Does THEJO Produce Much Cash Relative To Its Debt?

THEJO's debt levels have fallen from ₹413m to ₹334m over the last 12 months , which also accounts for long term debt. With this debt payback, THEJO's cash and short-term investments stands at ₹101m to keep the business going. Moreover, THEJO has generated cash from operations of ₹221m in the last twelve months, resulting in an operating cash to total debt ratio of 66%, meaning that THEJO’s current level of operating cash is high enough to cover debt.

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. The current ratio is the number you get when you divide current assets by current liabilities. 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.

Is THEJO’s debt level acceptable?

THEJO is a relatively highly levered company with a debt-to-equity of 48%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 lenders may be willing to lend out more funding as THEJO’s high interest coverage is seen as responsible and safe practice.

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. Since there is also no concerns around THEJO's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure THEJO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Thejo Engineering to get a more holistic view 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.