While small-cap stocks, such as Alok Industries Limited (NSE:ALOKTEXT) with its market cap of ₹4.64b, 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 ALOKTEXT is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into ALOKTEXT here.
Does ALOKTEXT produce enough cash relative to debt?
Over the past year, ALOKTEXT has ramped up its debt from ₹220.39b to ₹255.06b – this includes both the current and long-term debt. With this growth in debt, ALOKTEXT’s cash and short-term investments stands at ₹3.58b for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of ALOKTEXT’s operating efficiency ratios such as ROA here.
Can ALOKTEXT meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹217.18b liabilities, the company has not been able to meet these commitments with a current assets level of ₹144.59b, leading to a 0.67x current account ratio. which is under the appropriate industry ratio of 3x.
Is ALOKTEXT’s debt level acceptable?
With total debt exceeding equities, ALOKTEXT is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since ALOKTEXT is currently loss-making, 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, ALOKTEXT 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 ALOKTEXT 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. Keep in mind I haven’t considered other factors such as how ALOKTEXT has been performing in the past. You should continue to research Alok Industries to get a better picture of the stock by looking at: