While small-cap stocks, such as ASL Industries Limited (NSEI:ASLIND) with its market cap of ₹268.12M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into ASLIND here.

Does ASLIND generate enough cash through operations?

ASLIND has built up its total debt levels in the last twelve months, from ₹310.4M to ₹330.9M , which comprises of short- and long-term debt. With this rise in debt, ASLIND currently has ₹6.8M remaining in cash and short-term investments for investing into the business. Moreover, ASLIND has generated cash from operations of ₹131.5M during the same period of time, leading to an operating cash to total debt ratio of 39.73%, signalling that ASLIND’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ASLIND’s case, it is able to generate 0.4x cash from its debt capital.

Can ASLIND meet its short-term obligations with the cash in hand?

With current liabilities at ₹308.1M, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.86x, which is below the prudent industry ratio of 3x.

Is ASLIND’s debt level acceptable?

Since total debt levels have outpaced equities, ASLIND is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In ASLIND’s case, the ratio of 1.41x 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:

Although ASLIND’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether short term obligations can be met in time, and increasing debt funding to meet these needs could prove difficult. I admit this is a fairly basic analysis for ASLIND’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research ASL Industries to get a better picture of the stock by looking at: