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While small-cap stocks, such as Atlas Cycles (Haryana) Limited (NSE:ATLASCYCLE) with its market cap of ₹547m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that ATLASCYCLE is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into ATLASCYCLE here.
Does ATLASCYCLE produce enough cash relative to debt?
ATLASCYCLE’s debt levels have fallen from ₹918m to ₹528m over the last 12 months – this includes both the current and long-term debt. With this debt payback, ATLASCYCLE’s cash and short-term investments stands at ₹162m for investing into the business. Additionally, ATLASCYCLE has produced ₹344m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 65%, meaning that ATLASCYCLE’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In ATLASCYCLE’s case, it is able to generate 0.65x cash from its debt capital.
Can ATLASCYCLE meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹2.6b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of ₹2.7b, with a current ratio of 1.04x. Usually, for Leisure companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can ATLASCYCLE service its debt comfortably?
With a debt-to-equity ratio of 54%, ATLASCYCLE can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since ATLASCYCLE is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although ATLASCYCLE’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure ATLASCYCLE has company-specific issues impacting its capital structure decisions. You should continue to research Atlas Cycles (Haryana) to get a more holistic view of the small-cap by looking at: