Investors are always looking for growth in small-cap stocks like Ruchi Infrastructure Limited (NSE:RUCHINFRA), with a market cap of ₹503m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Consumer Retailing industry facing headwinds from current disruption, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into RUCHINFRA here.
How does RUCHINFRA’s operating cash flow stack up against its debt?
RUCHINFRA has shrunken its total debt levels in the last twelve months, from ₹2.5b to ₹2.3b , which also accounts for long term debt. With this debt repayment, RUCHINFRA's cash and short-term investments stands at ₹109m , ready to deploy into the business. On top of this, RUCHINFRA has produced ₹362m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 16%, meaning that RUCHINFRA’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In RUCHINFRA’s case, it is able to generate 0.16x cash from its debt capital.
Does RUCHINFRA’s liquid assets cover its short-term commitments?
Looking at RUCHINFRA’s ₹1.1b in current liabilities, the company has been able to meet these commitments with a current assets level of ₹1.2b, leading to a 1.09x current account ratio. Usually, for Consumer Retailing companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does RUCHINFRA face the risk of succumbing to its debt-load?
With total debt exceeding equities, RUCHINFRA is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since RUCHINFRA is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
RUCHINFRA’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around RUCHINFRA's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for RUCHINFRA's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Ruchi Infrastructure to get a better picture of the small-cap by looking at:
- Valuation: What is RUCHINFRA 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 RUCHINFRA is currently mispriced by the market.
- Historical Performance: What has RUCHINFRA'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.
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