While small-cap stocks, such as Ajmera Realty & Infra India Limited (NSE:AJMERA) with its market cap of ₹7.75b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, 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. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into AJMERA here.

How much cash does AJMERA generate through its operations?

AJMERA’s debt levels have fallen from ₹5.11b to ₹3.58b over the last 12 months – this includes both the current and long-term debt. With this debt payback, AJMERA’s cash and short-term investments stands at ₹196.00m 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 assess some of AJMERA’s operating efficiency ratios such as ROA here.

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

Looking at AJMERA’s most recent ₹2.53b liabilities, the company has been able to meet these obligations given the level of current assets of ₹11.13b, with a current ratio of 4.39x. However, anything about 3x may be excessive, since AJMERA may be leaving too much capital in low-earning investments.

Can AJMERA service its debt comfortably?

With debt reaching 54.33% of equity, AJMERA may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In AJMERA’s case, the ratio of 2.93x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

AJMERA’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. Keep in mind I haven’t considered other factors such as how AJMERA has been performing in the past. I recommend you continue to research Ajmera Realty & Infra India to get a more holistic view of the stock by looking at: