While small-cap stocks, such as Vaishali Pharma Limited (NSE:VAISHALI) with its market cap of ₹349m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Pharmaceuticals companies, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into VAISHALI here.

Does VAISHALI produce enough cash relative to debt?

VAISHALI has shrunken its total debt levels in the last twelve months, from ₹229m to ₹184m , which comprises of short- and long-term debt. With this reduction in debt, VAISHALI’s cash and short-term investments stands at ₹2m , ready to deploy 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 take a look at some of VAISHALI’s operating efficiency ratios such as ROA here.

Can VAISHALI pay its short-term liabilities?

With current liabilities at ₹409m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.44x. Usually, for Pharmaceuticals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can VAISHALI service its debt comfortably?

With a debt-to-equity ratio of 89%, VAISHALI can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether VAISHALI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In VAISHALI’s, case, the ratio of 2.04x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

At its current level of cash flow coverage, VAISHALI has room for improvement to better cushion for events which may require debt repayment. Though, 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 VAISHALI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Vaishali Pharma to get a more holistic view of the stock by looking at: