Are Creative Peripherals and Distribution Limited's (NSE:CREATIVE) Interest Costs Too High?

Investors are always looking for growth in small-cap stocks like Creative Peripherals and Distribution Limited (NSE:CREATIVE), with a market cap of ₹725.00m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into CREATIVE here.

How much cash does CREATIVE generate through its operations?

Over the past year, CREATIVE has ramped up its debt from ₹175.81m to ₹232.99m , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹17.35m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn't be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of CREATIVE’s operating efficiency ratios such as ROA here.

Does CREATIVE’s liquid assets cover its short-term commitments?

With current liabilities at ₹501.59m, the company has been able to meet these obligations given the level of current assets of ₹612.54m, with a current ratio of 1.22x. Generally, for Electronic 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.

Can CREATIVE service its debt comfortably?

With total debt exceeding equities, CREATIVE 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. 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 CREATIVE's case, the ratio of 1.73x 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.

Next Steps:

At its current level of cash flow coverage, CREATIVE has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how CREATIVE has been performing in the past. I recommend you continue to research Creative Peripherals and Distribution to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for CREATIVE’s future growth? Take a look at our free research report of analyst consensus for CREATIVE’s outlook.
2. Historical Performance: What has CREATIVE'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 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.