Himadri Speciality Chemical Limited (NSE:HSCL) is a small-cap stock with a market capitalization of ₹49b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into HSCL here.
HSCL’s Debt (And Cash Flows)
HSCL's debt levels have fallen from ₹7.7b to ₹6.6b over the last 12 months , which also accounts for long term debt. With this reduction in debt, HSCL's cash and short-term investments stands at ₹199m to keep the business going. On top of this, HSCL has generated ₹2.6b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 39%, indicating that HSCL’s operating cash is sufficient to cover its debt.
Can HSCL meet its short-term obligations with the cash in hand?
Looking at HSCL’s ₹6.6b in current liabilities, the company has been able to meet these commitments with a current assets level of ₹8.6b, leading to a 1.29x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does HSCL face the risk of succumbing to its debt-load?
With debt reaching 47% of equity, HSCL 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 HSCL 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 HSCL's, case, the ratio of 7.11x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving HSCL ample headroom to grow its debt facilities.
HSCL’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 HSCL's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure HSCL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Himadri Speciality Chemical to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HSCL’s future growth? Take a look at our free research report of analyst consensus for HSCL’s outlook.
- Valuation: What is HSCL 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 HSCL 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.
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