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Investors are always looking for growth in small-cap stocks like Sundram Fasteners Limited (NSE:SUNDRMFAST), with a market cap of ₹131.41b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into SUNDRMFAST here.
Does SUNDRMFAST produce enough cash relative to debt?
Over the past year, SUNDRMFAST has reduced its debt from ₹7.00b to ₹6.01b – this includes both the current and long-term debt. With this reduction in debt, SUNDRMFAST’s cash and short-term investments stands at ₹483.80m 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 examine some of SUNDRMFAST’s operating efficiency ratios such as ROA here.
Can SUNDRMFAST pay its short-term liabilities?
At the current liabilities level of ₹10.91b liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹14.54b, leading to a 1.33x current account ratio. Generally, for Auto Components 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 SUNDRMFAST’s debt level acceptable?
With debt at 39.05% of equity, SUNDRMFAST may be thought of as appropriately levered. This range is considered safe as SUNDRMFAST is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether SUNDRMFAST 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 SUNDRMFAST’s, case, the ratio of 15.79x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SUNDRMFAST ample headroom to grow its debt facilities.
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Although SUNDRMFAST’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure SUNDRMFAST has company-specific issues impacting its capital structure decisions. You should continue to research Sundram Fasteners to get a better picture of the stock by looking at: