Patspin India Limited (NSEI:PATSPINLTD) is a small-cap stock with a market capitalization of ₹643.14M. 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 crucial, as mismanagement of capital can lead to 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into PATSPINLTD here.
Does PATSPINLTD generate an acceptable amount of cash through operations?
PATSPINLTD has sustained its debt level by about ₹2.35B over the last 12 months – this includes both the current and long-term debt. At this constant level of debt, PATSPINLTD currently has ₹174.69M remaining in cash and short-term investments , ready to deploy into the business. On top of this, PATSPINLTD has produced ₹74.58M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 3.17%, signalling that PATSPINLTD’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PATSPINLTD’s case, it is able to generate 0.032x cash from its debt capital.
Can PATSPINLTD pay its short-term liabilities?
With current liabilities at ₹1.91B, the company has not been able to meet these commitments with a current assets level of ₹1.46B, leading to a 0.76x current account ratio. which is under the appropriate industry ratio of 3x.
Is PATSPINLTD’s debt level acceptable?Since total debt levels have outpaced equities, PATSPINLTD 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. 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 PATSPINLTD’s case, the ratio of 0.86x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as PATSPINLTD’s low interest coverage already puts the company at higher risk of default.
With a high level of debt on its balance sheet, PATSPINLTD 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 PATSPINLTD to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure PATSPINLTD has company-specific issues impacting its capital structure decisions. You should continue to research Patspin India to get a better picture of the stock by looking at:
- 1. Historical Performance: What has PATSPINLTD’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.