Is Visagar Polytex Limited (NSE:VIVIDHA) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like Visagar Polytex Limited (NSEI:VIVIDHA), with a market cap of ₹224.04M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into VIVIDHA here.

Does VIVIDHA generate enough cash through operations?

VIVIDHA has shrunken its total debt levels in the last twelve months, from ₹121.25M to ₹111.95M – this includes both the current and long-term debt. With this debt repayment, VIVIDHA currently has ₹3.21M remaining in cash and short-term investments for investing into the business. Moreover, VIVIDHA has generated ₹1.75M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 1.56%, meaning that VIVIDHA’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VIVIDHA’s case, it is able to generate 0.016x cash from its debt capital.

Can VIVIDHA pay its short-term liabilities?

At the current liabilities level of ₹230.18M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹439.36M, with a current ratio of 1.91x. For Luxury companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too capital in low return investments.

Is VIVIDHA’s debt level acceptable?

VIVIDHA’s level of debt is appropriate relative to its total equity, at 38.99%. VIVIDHA is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if VIVIDHA’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 VIVIDHA, the ratio of 1.97x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as VIVIDHA’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Although VIVIDHA’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how VIVIDHA has been performing in the past. I suggest you continue to research Visagar Polytex to get a better picture of the stock by looking at:

1. Valuation: What is VIVIDHA 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 VIVIDHA is currently mispriced by the market.
2. Historical Performance: What has VIVIDHA'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.