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Sree Rayalaseema Hi-Strength Hypo Limited (NSE:SRHHYPOLTD) is a small-cap stock with a market capitalization of ₹2.5b. 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? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SRHHYPOLTD here.
Does SRHHYPOLTD produce enough cash relative to debt?
Over the past year, SRHHYPOLTD has maintained its debt levels at around ₹781m – this includes both the current and long-term debt. At this constant level of debt, SRHHYPOLTD’s cash and short-term investments stands at ₹30m , ready to deploy into the business. Moreover, SRHHYPOLTD has generated ₹51m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 6.5%, meaning that SRHHYPOLTD’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SRHHYPOLTD’s case, it is able to generate 0.065x cash from its debt capital.
Does SRHHYPOLTD’s liquid assets cover its short-term commitments?
Looking at SRHHYPOLTD’s most recent ₹1.1b liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.34x. Generally, for Chemicals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does SRHHYPOLTD face the risk of succumbing to its debt-load?
With debt at 25% of equity, SRHHYPOLTD may be thought of as appropriately levered. SRHHYPOLTD is not taking on too much debt commitment, which may be constraining for future growth. We can test if SRHHYPOLTD’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 SRHHYPOLTD, the ratio of 3.79x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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SRHHYPOLTD’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure SRHHYPOLTD has company-specific issues impacting its capital structure decisions. You should continue to research Sree Rayalaseema Hi-Strength Hypo to get a better picture of the stock by looking at: