What You Must Know About Bharat Forge Limited’s (NSE:BHARATFORG) Financial Strength
Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Bharat Forge Limited (NSE:BHARATFORG) with a market-capitalization of ₹237b, rarely draw their attention. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Let’s take a look at BHARATFORG’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into BHARATFORG here.
See our latest analysis for Bharat Forge
Does BHARATFORG Produce Much Cash Relative To Its Debt?
BHARATFORG’s debt level has been constant at around ₹33b over the previous year which accounts for long term debt. At this current level of debt, the current cash and short-term investment levels stands at ₹6.9b to keep the business going. On top of this, BHARATFORG has generated cash from operations of ₹9.7b during the same period of time, leading to an operating cash to total debt ratio of 30%, signalling that BHARATFORG’s debt is appropriately covered by operating cash.
Can BHARATFORG pay its short-term liabilities?
With current liabilities at ₹38b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.22x. The current ratio is calculated by dividing current assets by current liabilities. For Auto Components 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.
Can BHARATFORG service its debt comfortably?
With debt reaching 70% of equity, BHARATFORG may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if BHARATFORG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For BHARATFORG, the ratio of 23.9x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving BHARATFORG ample headroom to grow its debt facilities.
Next Steps:
Although BHARATFORG’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. This is only a rough assessment of financial health, and I’m sure BHARATFORG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Bharat Forge to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for BHARATFORG’s future growth? Take a look at our free research report of analyst consensus for BHARATFORG’s outlook.
Valuation: What is BHARATFORG 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 BHARATFORG 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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