Adlabs Entertainment Limited (NSEI:ADLABS) is a small-cap stock with a market capitalization of ₹4.10B. 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? Given that ADLABS is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into ADLABS here.
How does ADLABS’s operating cash flow stack up against its debt?
ADLABS’s debt levels surged from ₹10.08B to ₹10.65B over the last 12 months , which is made up of current and long term debt. With this rise in debt, ADLABS currently has ₹72.18M remaining in cash and short-term investments for investing into the business. On top of this, ADLABS has generated ₹845.41M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 7.94%, signalling that ADLABS’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In ADLABS’s case, it is able to generate 0.079x cash from its debt capital.
Does ADLABS’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹1.61B liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.83x, which is below the prudent industry ratio of 3x.
Can ADLABS service its debt comfortably?
With total debt exceeding equities, ADLABS is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since ADLABS is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
With a high level of debt on its balance sheet, ADLABS could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for ADLABS to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how ADLABS has been performing in the past. You should continue to research Adlabs Entertainment to get a more holistic view of the stock by looking at: