Investors are always looking for growth in small-cap stocks like National Steel and Agro Industries Limited (NSEI:NATNLSTEEL), with a market cap of ₹1.95B. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into NATNLSTEEL here.
How does NATNLSTEEL’s operating cash flow stack up against its debt?
Over the past year, NATNLSTEEL has reduced its debt from ₹2,329.2M to ₹1,977.0M , which is made up of current and long term debt. With this debt repayment, NATNLSTEEL’s cash and short-term investments stands at ₹977.3M , ready to deploy into the business. On top of this, NATNLSTEEL has produced cash from operations of ₹1,720.4M in the last twelve months, leading to an operating cash to total debt ratio of 0.87x, indicating that NATNLSTEEL’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 NATNLSTEEL’s case, it is able to generate 0.87x cash from its debt capital.
Can NATNLSTEEL meet its short-term obligations with the cash in hand?
Looking at NATNLSTEEL’s most recent ₹8,852.8M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of ₹11,258.9M, with a current ratio of 1.27x. For metals and mining companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does NATNLSTEEL face the risk of succumbing to its debt-load?NATNLSTEEL is a relatively highly levered company with a debt-to-equity of 68.09%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether NATNLSTEEL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In NATNLSTEEL’s, case, the ratio of 1.3x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Are you a shareholder? NATNLSTEEL’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 NATNLSTEEL’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, NATNLSTEEL’s financial situation may change. I recommend keeping abreast of market expectations for NATNLSTEEL’s future growth on our free analysis platform.
Are you a potential investor? NATNLSTEEL’s high debt level shouldn’t scare off investors just yet. Its operating cash flow seems adequate to meet obligations which means its debt is being put to good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. To gain more conviction in the stock, you need to further examine NATNLSTEEL’s track record. As a following step, you should take a look at NATNLSTEEL’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.