While small-cap stocks, such as Venky's (India) Limited (NSEI:VENKYS) with its market cap of ₹63.02B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, 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. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into VENKYS here.
Does VENKYS generate enough cash through operations?
VENKYS's debt levels have fallen from ₹7.46B to ₹5.45B over the last 12 months – this includes both the current and long-term debt. With this debt payback, VENKYS's cash and short-term investments stands at ₹1.79B for investing into the business. On top of this, VENKYS has generated ₹2.11B in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 38.78%, signalling that VENKYS’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VENKYS’s case, it is able to generate 0.39x cash from its debt capital.
Does VENKYS’s liquid assets cover its short-term commitments?
With current liabilities at ₹6.20B, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.17x. Usually, for Food companies, this is a suitable ratio as there's enough of a cash buffer without holding too capital in low return investments.
Does VENKYS face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 70.36%, VENKYS can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether VENKYS is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In VENKYS's, case, the ratio of 10.96x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although VENKYS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure VENKYS has company-specific issues impacting its capital structure decisions. You should continue to research Venky's (India) to get a better picture of the small-cap by looking at:
- 1. Valuation: What is VENKYS 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 VENKYS is currently mispriced by the market.
- 2. Historical Performance: What has VENKYS'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 has no position in any of the companies mentioned. This article is general in nature. 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.
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