Investors are always looking for growth in small-cap stocks like Nandani Creation Limited (NSEI:NANDANI), with a market cap of ₹181.10M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into NANDANI here.
Does NANDANI generate enough cash through operations?
NANDANI’s debt levels surged from ₹8.1M to ₹24.2M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, NANDANI currently has ₹1.0M remaining in cash and short-term investments , ready to deploy into the business. Though its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. 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?
At the current liabilities level of ₹35.5M liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹50.7M, leading to a 1.43x current account ratio. 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.
Is NANDANI’s level of debt at an acceptable level?Since total debt levels have outpaced equities, NANDANI is a highly leveraged company. 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 NANDANI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) 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 debtors may be willing to loan the company more money, giving NANDANI ample headroom to grow its debt facilities.
Are you a shareholder? NANDANI’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that its financial position may change. I recommend keeping abreast of market expectations for NANDANI’s future growth on our free analysis platform.
Are you a potential investor? NANDANI’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. As a following step, you should take a look at NANDANI’s past performance analysis on our free platform to figure out NANDANI’s financial health position.