PPAP Automotive Limited (NSE:PPAP) is a small-cap stock with a market capitalization of ₹4.8b. 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? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into PPAP here.

How does PPAP’s operating cash flow stack up against its debt?

Over the past year, PPAP has reduced its debt from ₹520m to ₹296m , which also accounts for long term debt. With this debt repayment, PPAP’s cash and short-term investments stands at ₹14m , ready to deploy into the business. Additionally, PPAP has generated cash from operations of ₹772m during the same period of time, leading to an operating cash to total debt ratio of 261%, indicating that PPAP’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PPAP’s case, it is able to generate 2.61x cash from its debt capital.

Does PPAP’s liquid assets cover its short-term commitments?

Looking at PPAP’s ₹837m in current liabilities, the company has been able to meet these commitments with a current assets level of ₹1.0b, leading to a 1.24x current account ratio. Usually, for Auto Components companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

Can PPAP service its debt comfortably?

With a debt-to-equity ratio of 11%, PPAP’s debt level may be seen as prudent. This range is considered safe as PPAP is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if PPAP’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 PPAP, the ratio of 16.9x suggests that interest is comfortably 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.

Next Steps:

PPAP’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure PPAP has company-specific issues impacting its capital structure decisions. You should continue to research PPAP Automotive to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for PPAP’s future growth? Take a look at our free research report of analyst consensus for PPAP’s outlook.

2. Valuation: What is PPAP 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 PPAP is currently mispriced by the market.

3. 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.