Is Precot Meridian Limited's (NSE:PRECOT) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like Precot Meridian Limited (NSE:PRECOT), with a market cap of ₹541.20m. However, an important fact which most ignore is: how financially healthy is the business? Given that PRECOT is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into PRECOT here.

How does PRECOT’s operating cash flow stack up against its debt?

PRECOT has built up its total debt levels in the last twelve months, from ₹3.52b to ₹3.76b , which comprises of short- and long-term debt. With this increase in debt, PRECOT's cash and short-term investments stands at ₹92.40m , 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 PRECOT’s operating efficiency ratios such as ROA here.

Can PRECOT meet its short-term obligations with the cash in hand?

At the current liabilities level of ₹2.92b liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.88x, which is below the prudent industry ratio of 3x.

Is PRECOT’s debt level acceptable?

Since total debt levels have outpaced equities, PRECOT is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since PRECOT is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

PRECOT’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for PRECOT's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Precot Meridian to get a better picture of the stock by looking at:

1. Valuation: What is PRECOT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PRECOT is currently mispriced by the market.
2. Historical Performance: What has PRECOT'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.
3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.