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While small-cap stocks, such as Creative Peripherals and Distribution Limited (NSE:CREATIVE) with its market cap of ₹771m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into CREATIVE here.
CREATIVE’s Debt (And Cash Flows)
Over the past year, CREATIVE has ramped up its debt from ₹233m to ₹252m , which accounts for long term debt. With this increase in debt, CREATIVE currently has ₹22m remaining in cash and short-term investments to keep the business going. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of CREATIVE’s operating efficiency ratios such as ROA here.
Can CREATIVE meet its short-term obligations with the cash in hand?
Looking at CREATIVE’s ₹736m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹920m, with a current ratio of 1.25x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Electronic companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CREATIVE face the risk of succumbing to its debt-load?
With debt reaching 90% of equity, CREATIVE may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether CREATIVE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CREATIVE’s, case, the ratio of 2.77x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
CREATIVE’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 CREATIVE’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how CREATIVE has been performing in the past. I suggest you continue to research Creative Peripherals and Distribution to get a more holistic view of the small-cap 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.