While small-cap stocks, such as S E. Power Limited (NSEI:SEPOWER) with its market cap of ₹373.21M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since SEPOWER is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into SEPOWER here.

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

Over the past year, SEPOWER has ramped up its debt from ₹473.81M to ₹553.55M – this includes both the current and long-term debt. With this increase in debt, SEPOWER’s cash and short-term investments stands at ₹13.54M 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. 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 SEPOWER’s operating efficiency ratios such as ROA here.

Can SEPOWER pay its short-term liabilities?

With current liabilities at ₹79.53M, it appears that the company has been able to meet these obligations given the level of current assets of ₹128.50M, with a current ratio of 1.62x. For Chemicals companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

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

SEPOWER is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since SEPOWER is currently loss-making, sustainability of its current state of operations becomes a concern. 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:

SEPOWER’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for SEPOWER’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research S. E. Power to get a better picture of the stock by looking at: