Is Bhansali Engineering Polymers Limited (NSE:BEPL) A Financially Sound Company?

Zero-debt allows substantial financial flexibility, especially for small-cap companies like Bhansali Engineering Polymers Limited (NSE:BEPL), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I will go over a basic overview of the stock's financial health, which I believe provides a ballpark estimate of their financial health status.

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Is financial flexibility worth the lower cost of capital?

Debt capital generally has lower cost of capital compared to equity funding. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. Either BEPL does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. BEPL’s revenue growth over the past year is an impressively high double-digit 65%. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.

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

Since Bhansali Engineering Polymers doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of ₹1.5b, it appears that the company has been able to meet these commitments with a current assets level of ₹3.1b, leading to a 2.04x current account ratio. Generally, for Chemicals companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Next Steps:

BEPL is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around BEPL's liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. I admit this is a fairly basic analysis for BEPL's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Bhansali Engineering Polymers to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for BEPL’s future growth? Take a look at our free research report of analyst consensus for BEPL’s outlook.
2. Valuation: What is BEPL 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 BEPL is currently mispriced by the market.
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.

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.

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.