Meghmani Organics Limited (NSEI:MEGH) is a small-cap stock with a market capitalization of ₹24.99B. 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 vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into MEGH here.
How does MEGH’s operating cash flow stack up against its debt?
MEGH has shrunken its total debt levels in the last twelve months, from ₹5.78B to ₹4.61B , which comprises of short- and long-term debt. With this reduction in debt, MEGH currently has ₹389.57M remaining in cash and short-term investments for investing into the business. On top of this, MEGH has generated cash from operations of ₹2.63B during the same period of time, leading to an operating cash to total debt ratio of 57.12%, signalling that MEGH’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MEGH’s case, it is able to generate 0.57x cash from its debt capital.
Can MEGH meet its short-term obligations with the cash in hand?
Looking at MEGH’s most recent ₹5.51B liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹7.65B, leading to a 1.39x current account ratio. Usually, for Chemicals companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MEGH’s debt level acceptable?
With debt reaching 43.52% of equity, MEGH may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MEGH 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 MEGH’s, case, the ratio of 8.21x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although MEGH’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. Since there is also no concerns around MEGH’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 MEGH has been performing in the past. I suggest you continue to research Meghmani Organics to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MEGH’s future growth? Take a look at our free research report of analyst consensus for MEGH’s outlook.
- Valuation: What is MEGH 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 MEGH 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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.