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Investors are always looking for growth in small-cap stocks like Powerful Technologies Limited (NSE:POWERFUL), with a market cap of ₹205m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Consumer Durables industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into POWERFUL here.
How much cash does POWERFUL generate through its operations?
Over the past year, POWERFUL has ramped up its debt from ₹61m to ₹68m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹244k 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. 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 POWERFUL’s operating efficiency ratios such as ROA here.
Can POWERFUL pay its short-term liabilities?
Looking at POWERFUL’s ₹184m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹304m, leading to a 1.66x current account ratio. For Consumer Durables companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can POWERFUL service its debt comfortably?
With a debt-to-equity ratio of 54%, POWERFUL can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if POWERFUL’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For POWERFUL, the ratio of 8.39x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving POWERFUL ample headroom to grow its debt facilities.
Although POWERFUL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 POWERFUL has been performing in the past. I suggest you continue to research Powerful Technologies to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for POWERFUL’s future growth? Take a look at our free research report of analyst consensus for POWERFUL’s outlook.
- Historical Performance: What has POWERFUL’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 email@example.com.