Goldstar Power Limited (NSEI:GOLDSTAR) is a small-cap stock with a market capitalization of ₹411.87M. 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? Assessing first and foremost the financial health is vital, 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, I know these factors are very high-level, so I suggest you dig deeper yourself into GOLDSTAR here.
How does GOLDSTAR’s operating cash flow stack up against its debt?
GOLDSTAR’s debt levels have fallen from ₹141.1M to ₹127.9M over the last 12 months , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at ₹6.7M , ready to deploy into the business. On top of this, GOLDSTAR has generated ₹26.4M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.21x, signalling that GOLDSTAR’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GOLDSTAR’s case, it is able to generate 0.21x cash from its debt capital.
Does GOLDSTAR’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹166.8M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of ₹141.6M, with a current ratio of 0.85x below the prudent level of 3x.
Is GOLDSTAR’s level of debt at an acceptable level?
Since total debt levels have outpaced equities, GOLDSTAR 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. We can check to see whether GOLDSTAR is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In GOLDSTAR’s, case, the ratio of 1.66x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as GOLDSTAR’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Are you a shareholder? With a high level of debt on its balance sheet, GOLDSTAR 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 GOLDSTAR to increase its operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. In the future, its financial position may change. I suggest keeping on top of market expectations for GOLDSTAR’s future growth on our free analysis platform.