While small-cap stocks, such as Opal Luxury Time Products Limited (NSE:OPAL) with its market cap of ₹359m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Consumer Durables industry facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into OPAL here.
How much cash does OPAL generate through its operations?
Over the past year, OPAL has ramped up its debt from ₹83m to ₹176m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at ₹423k , ready to deploy into the business. Moving onto cash from operations, 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 examine some of OPAL’s operating efficiency ratios such as ROA here.
Can OPAL meet its short-term obligations with the cash in hand?
Looking at OPAL’s ₹157m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹251m, with a current ratio of 1.6x. Usually, for Consumer Durables companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can OPAL service its debt comfortably?
OPAL is a relatively highly levered company with a debt-to-equity of 92%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since OPAL is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
OPAL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how OPAL has been performing in the past. I recommend you continue to research Opal Luxury Time Products to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has OPAL’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.