While small-cap stocks, such as Bafna Pharmaceuticals Limited (NSE:BAFNAPHARM) with its market cap of ₹282m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Pharmaceuticals companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into BAFNAPHARM here.
How much cash does BAFNAPHARM generate through its operations?
Over the past year, BAFNAPHARM has reduced its debt from ₹824m to ₹465m , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at ₹30m , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of BAFNAPHARM’s operating efficiency ratios such as ROA here.
Does BAFNAPHARM’s liquid assets cover its short-term commitments?
With current liabilities at ₹598m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.81x.
Can BAFNAPHARM service its debt comfortably?
With total debt exceeding equities, BAFNAPHARM is considered a highly levered 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 BAFNAPHARM is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
With a high level of debt on its balance sheet, BAFNAPHARM could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for BAFNAPHARM to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for BAFNAPHARM’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Bafna Pharmaceuticals to get a better picture of the stock by looking at: