Investors are always looking for growth in small-cap stocks like Aakash Exploration Services Limited (NSE:AAKASH), with a market cap of ₹189m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Energy Services industry, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into AAKASH here.

How much cash does AAKASH generate through its operations?

Over the past year, AAKASH has ramped up its debt from ₹145m to ₹204m , which is made up of current and long term debt. With this increase in debt, AAKASH’s cash and short-term investments stands at ₹9m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of AAKASH’s operating efficiency ratios such as ROA here.

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

Looking at AAKASH’s most recent ₹90m liabilities, the company has been able to meet these commitments with a current assets level of ₹237m, leading to a 2.62x current account ratio. Usually, for Energy Services 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.

Does AAKASH face the risk of succumbing to its debt-load?

AAKASH is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if AAKASH’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 AAKASH, the ratio of 3.49x suggests that interest is appropriately 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:

At its current level of cash flow coverage, AAKASH has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure AAKASH has company-specific issues impacting its capital structure decisions. I suggest you continue to research Aakash Exploration Services to get a more holistic view of the stock by looking at:

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

2. Historical Performance: What has AAKASH’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

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.