Autolite (India) Limited (NSE:AUTOLITIND) is a small-cap stock with a market capitalization of ₹452m. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into AUTOLITIND here.
How much cash does AUTOLITIND generate through its operations?
Over the past year, AUTOLITIND has maintained its debt levels at around ₹359m which accounts for long term debt. At this stable level of debt, AUTOLITIND’s cash and short-term investments stands at ₹14m for investing into the business. On top of this, AUTOLITIND has generated cash from operations of ₹119m during the same period of time, resulting in an operating cash to total debt ratio of 33%, indicating that AUTOLITIND’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AUTOLITIND’s case, it is able to generate 0.33x cash from its debt capital.
Does AUTOLITIND’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹502m, it appears that the company has been able to meet these obligations given the level of current assets of ₹622m, with a current ratio of 1.24x. Generally, for Auto Components companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can AUTOLITIND service its debt comfortably?
AUTOLITIND is a relatively highly levered company with a debt-to-equity of 89%. 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 AUTOLITIND’s case, the ratio of 1.01x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as AUTOLITIND’s low interest coverage already puts the company at higher risk of default.