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While small-cap stocks, such as The Andhra Sugars Limited (NSE:ANDHRSUGAR) with its market cap of ₹9.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into ANDHRSUGAR here.
How does ANDHRSUGAR’s operating cash flow stack up against its debt?
Over the past year, ANDHRSUGAR has reduced its debt from ₹3.7b to ₹2.6b , which also accounts for long term debt. With this debt payback, ANDHRSUGAR’s cash and short-term investments stands at ₹634m for investing into the business. Moreover, ANDHRSUGAR has produced cash from operations of ₹2.0b during the same period of time, resulting in an operating cash to total debt ratio of 79%, signalling that ANDHRSUGAR’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ANDHRSUGAR’s case, it is able to generate 0.79x cash from its debt capital.
Can ANDHRSUGAR pay its short-term liabilities?
Looking at ANDHRSUGAR’s ₹2.4b in current liabilities, the company has been able to meet these obligations given the level of current assets of ₹6.2b, with a current ratio of 2.62x. Usually, for Chemicals 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 ANDHRSUGAR face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 24%, ANDHRSUGAR’s debt level may be seen as prudent. This range is considered safe as ANDHRSUGAR is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether ANDHRSUGAR 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 ANDHRSUGAR’s, case, the ratio of 7x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ANDHRSUGAR ample headroom to grow its debt facilities.
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ANDHRSUGAR has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, 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 ANDHRSUGAR’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Andhra Sugars to get a more holistic view of the stock by looking at: