Bharat Forge Limited (NSE:BHARATFORG) is a small-cap stock with a market capitalization of ₹237b. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into BHARATFORG here.
Does BHARATFORG Produce Much Cash Relative To Its Debt?
BHARATFORG has sustained its debt level by about ₹33b over the last 12 months – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at ₹6.9b , ready to be used for running the business. On top of this, BHARATFORG has produced cash from operations of ₹9.7b over the same time period, resulting in an operating cash to total debt ratio of 30%, signalling that BHARATFORG’s operating cash is sufficient to cover its debt.
Can BHARATFORG meet its short-term obligations with the cash in hand?
With current liabilities at ₹38b, it seems that the business has been able to meet these obligations given the level of current assets of ₹46b, with a current ratio of 1.22x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Auto Components companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does BHARATFORG face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 70%, BHARATFORG can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BHARATFORG's case, the ratio of 23.9x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as BHARATFORG’s high interest coverage is seen as responsible and safe practice.
BHARATFORG’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. 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 BHARATFORG's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Bharat Forge to get a more holistic view of the small-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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