Nandani Creation Limited (NSEI:NANDANI) is a small-cap stock with a market capitalization of ₹227.12M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into NANDANI here.
Does NANDANI generate an acceptable amount of cash through operations?
Over the past year, NANDANI has ramped up its debt from ₹8.09M to ₹24.16M , which comprises of short- and long-term debt. With this rise in debt, NANDANI’s cash and short-term investments stands at ₹1.02M , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of NANDANI’s operating efficiency ratios such as ROA here.
Does NANDANI’s liquid assets cover its short-term commitments?
With current liabilities at ₹35.52M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.43x. Usually, for Luxury 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 NANDANI service its debt comfortably?NANDANI is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 NANDANI’s case, the ratio of 5.42x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as NANDANI’s high interest coverage is seen as responsible and safe practice.
At its current level of cash flow coverage, NANDANI has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure NANDANI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Nandani Creation to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has NANDANI’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.
- 2. 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.