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Investors are always looking for growth in small-cap stocks like The Indian Hotels Company Limited (NSE:INDHOTEL), with a market cap of ₹174b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to 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. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into INDHOTEL here.
Does INDHOTEL Produce Much Cash Relative To Its Debt?
INDHOTEL has sustained its debt level by about ₹23b over the last 12 months – this includes long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at ₹4.5b , ready to be used for running the business. On top of this, INDHOTEL has produced ₹7.1b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 31%, signalling that INDHOTEL’s debt is appropriately covered by operating cash.
Can INDHOTEL pay its short-term liabilities?
Looking at INDHOTEL’s ₹21b in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of ₹12b, leading to a current ratio of 0.55x. The current ratio is the number you get when you divide current assets by current liabilities.
Is INDHOTEL’s debt level acceptable?
INDHOTEL is a relatively highly levered company with a debt-to-equity of 45%. 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 INDHOTEL 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 INDHOTEL's, case, the ratio of 3.03x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving INDHOTEL ample headroom to grow its debt facilities.
Although INDHOTEL’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. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how INDHOTEL has been performing in the past. I suggest you continue to research Indian Hotels to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for INDHOTEL’s future growth? Take a look at our free research report of analyst consensus for INDHOTEL’s outlook.
- Valuation: What is INDHOTEL 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 INDHOTEL 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.
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.