While small-cap stocks, such as Morarjee Textiles Limited (NSE:MORARJEE) with its market cap of ₹1.16b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into MORARJEE here.
How much cash does MORARJEE generate through its operations?
MORARJEE has sustained its debt level by about ₹4.81b over the last 12 months made up of current and long term debt. At this stable level of debt, the current cash and short-term investment levels stands at ₹56.00m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of MORARJEE’s operating efficiency ratios such as ROA here.
Does MORARJEE’s liquid assets cover its short-term commitments?
With current liabilities at ₹2.31b, it appears that the company is not able to meet these obligations given the level of current assets of ₹2.26b, with a current ratio of 0.98x below the prudent level of 3x.
Does MORARJEE face the risk of succumbing to its debt-load?MORARJEE is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MORARJEE 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 MORARJEE’s, case, the ratio of 0.89x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
With a high level of debt on its balance sheet, MORARJEE could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for MORARJEE to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how MORARJEE has been performing in the past. I recommend you continue to research Morarjee Textiles to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MORARJEE’s future growth? Take a look at our free research report of analyst consensus for MORARJEE’s outlook.
- Historical Performance: What has MORARJEE’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.