While small-cap stocks, such as Phillips Carbon Black Limited (NSE:PHILIPCARB) with its market cap of ₹34.84b, 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, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into PHILIPCARB here.
Does PHILIPCARB produce enough cash relative to debt?
PHILIPCARB has shrunken its total debt levels in the last twelve months, from ₹7.58b to ₹7.17b – this includes both the current and long-term debt. With this reduction in debt, PHILIPCARB currently has ₹1.72b remaining in cash and short-term investments for investing into the business. On top of this, PHILIPCARB has produced ₹2.93b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 40.78%, signalling that PHILIPCARB’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PHILIPCARB’s case, it is able to generate 0.41x cash from its debt capital.
Can PHILIPCARB meet its short-term obligations with the cash in hand?
Looking at PHILIPCARB’s most recent ₹10.95b liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.94x, which is below the prudent industry ratio of 3x.
Does PHILIPCARB face the risk of succumbing to its debt-load?
PHILIPCARB is a relatively highly levered company with a debt-to-equity of 51.82%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In PHILIPCARB's case, the ratio of 9.36x suggests that interest is appropriately 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.Next Steps:
Although PHILIPCARB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how PHILIPCARB has been performing in the past. I suggest you continue to research Phillips Carbon Black to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PHILIPCARB’s future growth? Take a look at our free research report of analyst consensus for PHILIPCARB’s outlook.
- Valuation: What is PHILIPCARB 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 PHILIPCARB is currently mispriced by the market.
- 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 pass 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.