While small-cap stocks, such as RattanIndia Power Limited (NSEI:RTNPOWER) with its market cap of ₹16.42B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that RTNPOWER is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into RTNPOWER here.

Does RTNPOWER generate an acceptable amount of cash through operations?

Over the past year, RTNPOWER has ramped up its debt from ₹135.52B to ₹147.02B , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at ₹3.80B for investing into the business. On top of this, RTNPOWER has generated ₹12.06B in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 8.20%, indicating that RTNPOWER’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In RTNPOWER’s case, it is able to generate 0.082x cash from its debt capital.

Can RTNPOWER pay its short-term liabilities?

At the current liabilities level of ₹41.98B liabilities, the company has not been able to meet these commitments with a current assets level of ₹23.69B, leading to a 0.56x current account ratio. which is under the appropriate industry ratio of 3x.

Can RTNPOWER service its debt comfortably?

RTNPOWER 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 RTNPOWER is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

RTNPOWER’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how RTNPOWER has been performing in the past. I suggest you continue to research RattanIndia Power to get a better picture of the stock by looking at: