In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
While small-cap stocks, such as Alembic Pharmaceuticals Limited (NSE:APLLTD) with its market cap of ₹94b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into APLLTD here.
Does APLLTD Produce Much Cash Relative To Its Debt?
Over the past year, APLLTD has ramped up its debt from ₹7.1b to ₹11b – this includes long-term debt. With this growth in debt, APLLTD's cash and short-term investments stands at ₹2.0b to keep the business going. On top of this, APLLTD has produced cash from operations of ₹8.1b over the same time period, leading to an operating cash to total debt ratio of 72%, meaning that APLLTD’s operating cash is sufficient to cover its debt.
Does APLLTD’s liquid assets cover its short-term commitments?
With current liabilities at ₹15b, it appears that the company has been able to meet these commitments with a current assets level of ₹20b, leading to a 1.31x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. 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.
Does APLLTD face the risk of succumbing to its debt-load?
APLLTD is a relatively highly levered company with a debt-to-equity of 42%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if APLLTD’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 APLLTD, the ratio of 54.07x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as APLLTD’s high interest coverage is seen as responsible and safe practice.
Next Steps:
APLLTD’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. Since there is also no concerns around APLLTD's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure APLLTD has company-specific issues impacting its capital structure decisions. You should continue to research Alembic Pharmaceuticals to get a more holistic view of the small-cap by looking at: