While small-cap stocks, such as Creative Peripherals and Distribution Limited (NSEI:CREATIVE) with its market cap of ₹810.84M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Electronic industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. 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 recommend you dig deeper yourself into CREATIVE here.
How does CREATIVE’s operating cash flow stack up against its debt?
CREATIVE has built up its total debt levels in the last twelve months, from ₹175.81M to ₹232.99M , which comprises of short- and long-term debt. With this increase in debt, CREATIVE’s cash and short-term investments 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 take a look at some of CREATIVE’s operating efficiency ratios such as ROA here.
Can CREATIVE meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹501.59M liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹612.54M, leading to a 1.22x current account ratio. Usually, for Electronic companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can CREATIVE service its debt comfortably?With total debt exceeding equities, CREATIVE is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 be more reluctant to lend out more funding as CREATIVE’s low interest coverage already puts the company at higher risk of default.
CREATIVE’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure CREATIVE has company-specific issues impacting its capital structure decisions. You should continue to research Creative Peripherals and Distribution to get a more holistic view of the stock by looking at:
- 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.
- 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.