DCM Shriram Limited (NSEI:DCMSHRIRAM) is a small-cap stock with a market capitalization of ₹49.68B. 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 vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into DCMSHRIRAM here.
Does DCMSHRIRAM generate enough cash through operations?
DCMSHRIRAM’s debt levels have fallen from ₹10.74B to ₹6.61B over the last 12 months , which is made up of current and long term debt. With this reduction in debt, DCMSHRIRAM currently has ₹1.76B remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of DCMSHRIRAM’s operating efficiency ratios such as ROA here.
Can DCMSHRIRAM meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹18.66B liabilities, the company has been able to meet these obligations given the level of current assets of ₹30.97B, with a current ratio of 1.66x. Usually, for Chemicals companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is DCMSHRIRAM’s debt level acceptable?
With a debt-to-equity ratio of 21.75%, DCMSHRIRAM’s debt level may be seen as prudent. DCMSHRIRAM is not taking on too much debt commitment, which may be constraining for future growth. We can test if DCMSHRIRAM’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 DCMSHRIRAM, the ratio of 10.77x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as DCMSHRIRAM’s high interest coverage is seen as responsible and safe practice.
DCMSHRIRAM’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for DCMSHRIRAM’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research DCM Shriram to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DCMSHRIRAM’s future growth? Take a look at our free research report of analyst consensus for DCMSHRIRAM’s outlook.
- Valuation: What is DCMSHRIRAM 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 DCMSHRIRAM 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.