While small-cap stocks, such as Pulz Electronics Limited (NSE:PULZ) with its market cap of ₹88m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into PULZ here.
How much cash does PULZ generate through its operations?
Over the past year, PULZ has ramped up its debt from ₹16m to ₹20m , which accounts for long term debt. With this growth in debt, PULZ’s cash and short-term investments stands at ₹34m for investing into the business. Moreover, PULZ has produced cash from operations of ₹6.1m in the last twelve months, leading to an operating cash to total debt ratio of 31%, meaning that PULZ’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PULZ’s case, it is able to generate 0.31x cash from its debt capital.
Can PULZ pay its short-term liabilities?
With current liabilities at ₹67m, the company has been able to meet these commitments with a current assets level of ₹140m, leading to a 2.07x current account ratio. 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 PULZ service its debt comfortably?
With a debt-to-equity ratio of 22%, PULZ’s debt level may be seen as prudent. This range is considered safe as PULZ is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if PULZ’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 PULZ, the ratio of 13.3x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as PULZ’s high interest coverage is seen as responsible and safe practice.
Next Steps:
PULZ has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how PULZ has been performing in the past. I suggest you continue to research Pulz Electronics to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PULZ’s future growth? Take a look at our free research report of analyst consensus for PULZ’s outlook.
- Historical Performance: What has PULZ’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 editorial-team@simplywallst.com.