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SKIL Infrastructure Limited (NSE:SKIL) is a small-cap stock with a market capitalization of ₹2.6b. 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? Given that SKIL is not presently profitable, it’s crucial 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. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into SKIL here.
How does SKIL’s operating cash flow stack up against its debt?
Over the past year, SKIL has reduced its debt from ₹29.9b to ₹25.1b , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at ₹346m , ready to deploy 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 take a look at some of SKIL’s operating efficiency ratios such as ROA here.
Can SKIL meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹13.7b liabilities, the company may not be able to easily meet these obligations given the level of current assets of ₹12.2b, with a current ratio of 0.89x.
Does SKIL face the risk of succumbing to its debt-load?
SKIL 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. However, since SKIL is currently unprofitable, 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.
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With a high level of debt on its balance sheet, SKIL could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for SKIL to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for SKIL’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research SKIL Infrastructure to get a better picture of the stock by looking at: