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 ₹743m. However, an important fact which most ignore is: how financially healthy is the business? Since PRECOT is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I suggest you 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 ₹3.5b to ₹3.8b – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹16m for investing into the business. On top of this, PRECOT has generated cash from operations of ₹107m during the same period of time, leading to an operating cash to total debt ratio of 2.8%, signalling that PRECOT’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In PRECOT’s case, it is able to generate 0.028x cash from its debt capital.

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

At the current liabilities level of ₹2.9b liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of ₹2.6b, leading to a current ratio of 0.88x.

NSEI:PRECOT Historical Debt November 15th 18
NSEI:PRECOT Historical Debt November 15th 18

Is PRECOT’s debt level acceptable?

PRECOT is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since PRECOT is presently unprofitable, sustainability of its current state of operations becomes a concern. 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:

With a high level of debt on its balance sheet, PRECOT 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 PRECOT to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure PRECOT has company-specific issues impacting its capital structure decisions. I suggest you continue to research Precot Meridian to get a better picture of the stock by looking at:

  1. 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.
  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.

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 editorial-team@simplywallst.com.