While small-cap stocks, such as Sunil Hitech Engineers Limited (NSE:SUNILHITEC) with its market cap of ₹668.9m, 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 SUNILHITEC is not presently profitable, it’s crucial 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. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into SUNILHITEC here.
How much cash does SUNILHITEC generate through its operations?
SUNILHITEC has built up its total debt levels in the last twelve months, from ₹6.59b to ₹7.12b , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹1.85b for investing into the business. Moreover, SUNILHITEC has produced cash from operations of ₹418.8m during the same period of time, resulting in an operating cash to total debt ratio of 5.9%, signalling that SUNILHITEC’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In SUNILHITEC’s case, it is able to generate 0.059x cash from its debt capital.
Does SUNILHITEC’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹17.85b liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹22.28b, leading to a 1.25x current account ratio. Generally, for Machinery companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SUNILHITEC service its debt comfortably?
Since total debt levels have outpaced equities, SUNILHITEC is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since SUNILHITEC is currently loss-making, 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:
SUNILHITEC’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, 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 SUNILHITEC has been performing in the past. I suggest you continue to research Sunil Hitech Engineers to get a better picture of the stock by looking at: