Investors are always looking for growth in small-cap stocks like Lypsa Gems & Jewellery Limited (NSEI:LYPSAGEMS), with a market cap of ₹689.93M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, 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. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into LYPSAGEMS here.
Does LYPSAGEMS generate an acceptable amount of cash through operations?
LYPSAGEMS’s debt levels have fallen from ₹324.09M to ₹239.57M over the last 12 months made up of predominantly near term debt. With this debt payback, LYPSAGEMS currently has ₹11.19M remaining in cash and short-term investments , ready to deploy into the business. On top of this, LYPSAGEMS has generated cash from operations of ₹23.49M during the same period of time, resulting in an operating cash to total debt ratio of 9.81%, indicating that LYPSAGEMS’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LYPSAGEMS’s case, it is able to generate 0.098x cash from its debt capital.
Can LYPSAGEMS pay its short-term liabilities?
At the current liabilities level of ₹2.55B liabilities, the company has been able to meet these commitments with a current assets level of ₹3.41B, leading to a 1.34x current account ratio. For Luxury companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does LYPSAGEMS face the risk of succumbing to its debt-load?LYPSAGEMS’s level of debt is appropriate relative to its total equity, at 20.64%. This range is considered safe as LYPSAGEMS is not taking on too much debt obligation, which may be constraining for future growth. We can test if LYPSAGEMS’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 LYPSAGEMS, the ratio of 21.33x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving LYPSAGEMS ample headroom to grow its debt facilities.
LYPSAGEMS’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. Keep in mind I haven’t considered other factors such as how LYPSAGEMS has been performing in the past. I suggest you continue to research Lypsa Gems & Jewellery to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LYPSAGEMS’s future growth? Take a look at our free research report of analyst consensus for LYPSAGEMS’s outlook.
- Historical Performance: What has LYPSAGEMS’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.