Is Indian Metals and Ferro Alloys Limited's (NSE:IMFA) Balance Sheet A Threat To Its Future?
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Investors are always looking for growth in small-cap stocks like Indian Metals and Ferro Alloys Limited (NSE:IMFA), with a market cap of ₹4.9b. However, an important fact which most ignore is: how financially healthy is the business? Given that IMFA is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into IMFA here.
Does IMFA Produce Much Cash Relative To Its Debt?
IMFA has shrunk its total debt levels in the last twelve months, from ₹8.2b to ₹7.7b , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at ₹989m to keep the business going. On top of this, IMFA has generated cash from operations of ₹2.2b over the same time period, resulting in an operating cash to total debt ratio of 28%, indicating that IMFA’s current level of operating cash is high enough to cover debt.
Does IMFA’s liquid assets cover its short-term commitments?
Looking at IMFA’s ₹8.2b in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹9.2b, with a current ratio of 1.12x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Metals and Mining companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can IMFA service its debt comfortably?
IMFA is a relatively highly levered company with a debt-to-equity of 64%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since IMFA is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
IMFA’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. Keep in mind I haven't considered other factors such as how IMFA has been performing in the past. I recommend you continue to research Indian Metals and Ferro Alloys to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for IMFA’s future growth? Take a look at our free research report of analyst consensus for IMFA’s outlook.
Valuation: What is IMFA 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 IMFA 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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