Investors are always looking for growth in small-cap stocks like Beta Drugs Limited (NSEI:BETA), with a market cap of ₹1.69B. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the pharmaceuticals industry, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. 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 BETA here.

How does BETA’s operating cash flow stack up against its debt?

Over the past year, BETA has maintained its debt levels at around ₹82.1M – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at ₹1.4M for investing into the business. Moreover, BETA has produced cash from operations of ₹30.3M over the same time period, leading to an operating cash to total debt ratio of 36.87%, indicating that BETA’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BETA’s case, it is able to generate 0.37x cash from its debt capital.

Does BETA’s liquid assets cover its short-term commitments?

Looking at BETA’s most recent ₹132.7M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.22x. Generally, for pharmaceuticals companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is BETA’s debt level acceptable?

Since total debt levels have outpaced equities, BETA 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. We can test if BETA’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For BETA, the ratio of 7.92x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as BETA’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Are you a shareholder? Although BETA’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. Since there is also no concerns around BETA’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. You should always be researching market expectations for BETA’s future growth on our free analysis platform.

Are you a potential investor? Investors shouldn’t be put off by BETA’s high debt levels based on this simple analysis. High level of cash generated from operating activities indicates its debt funding is being effectively used. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. To gain more conviction in the stock, you need to also examine BETA’s track record. As a following step, you should take a look at BETA’s past performance analysis on our free platform to figure out BETA’s financial health position.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.