Are Kshitij Polyline Limited's (NSE:KSHITIJPOL) Interest Costs Too High?
While small-cap stocks, such as Kshitij Polyline Limited (NSE:KSHITIJPOL) with its market cap of ₹267m, 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 crucial, 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, this is not a comprehensive overview, so I recommend you dig deeper yourself into KSHITIJPOL here.
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KSHITIJPOL’s Debt (And Cash Flows)
Over the past year, KSHITIJPOL has ramped up its debt from ₹106m to ₹115m – this includes long-term debt. With this rise in debt, KSHITIJPOL currently has ₹794k remaining in cash and short-term investments , ready to be used for running the business. Additionally, KSHITIJPOL has produced cash from operations of ₹17m over the same time period, leading to an operating cash to total debt ratio of 15%, signalling that KSHITIJPOL’s debt is not covered by operating cash.
Does KSHITIJPOL’s liquid assets cover its short-term commitments?
Looking at KSHITIJPOL’s ₹122m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of ₹175m, leading to a 1.43x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Commercial Services companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Is KSHITIJPOL’s debt level acceptable?
With total debt exceeding equity, KSHITIJPOL is considered a highly levered company. 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 KSHITIJPOL 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 KSHITIJPOL's, case, the ratio of 1.96x 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.
Next Steps:
Although KSHITIJPOL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for KSHITIJPOL's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Kshitij Polyline to get a better picture of the small-cap by looking at:
Valuation: What is KSHITIJPOL 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 KSHITIJPOL is currently mispriced by the market.
Historical Performance: What has KSHITIJPOL'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 editorial-team@simplywallst.com. 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.
