Investors are always looking for growth in small-cap stocks like Bannari Amman Sugars Limited (NSE:BANARISUG), with a market cap of ₹17.94b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, 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, this commentary is still very high-level, so I suggest you dig deeper yourself into BANARISUG here.

Does BANARISUG produce enough cash relative to debt?

Over the past year, BANARISUG has reduced its debt from ₹10.38b to ₹5.71b – this includes both the current and long-term debt. With this debt repayment, BANARISUG’s cash and short-term investments stands at ₹37.79m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of BANARISUG’s operating efficiency ratios such as ROA here.

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

Looking at BANARISUG’s most recent ₹4.26b liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹6.68b, with a current ratio of 1.57x. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Does BANARISUG face the risk of succumbing to its debt-load?

BANARISUG is a relatively highly levered company with a debt-to-equity of 50.24%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether BANARISUG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BANARISUG’s, case, the ratio of 4.32x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving BANARISUG ample headroom to grow its debt facilities.

Next Steps:

BANARISUG’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for BANARISUG’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Bannari Amman Sugars to get a more holistic view of the stock by looking at: