Investors are always looking for growth in small-cap stocks like Airan Limited (NSE:AIRAN), with a market cap of ₹3.9b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the IT industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into AIRAN here.
How much cash does AIRAN generate through its operations?
Over the past year, AIRAN has ramped up its debt from ₹127m to ₹152m , which includes long-term debt. With this growth in debt, AIRAN currently has ₹115m remaining in cash and short-term investments for investing into the business. Additionally, AIRAN has produced cash from operations of ₹17m in the last twelve months, resulting in an operating cash to total debt ratio of 11%, indicating that AIRAN’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AIRAN’s case, it is able to generate 0.11x cash from its debt capital.
Can AIRAN meet its short-term obligations with the cash in hand?
With current liabilities at ₹105m, it seems that the business has been able to meet these commitments with a current assets level of ₹353m, leading to a 3.36x current account ratio. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can AIRAN service its debt comfortably?
With a debt-to-equity ratio of 19%, AIRAN’s debt level may be seen as prudent. This range is considered safe as AIRAN is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if AIRAN’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AIRAN, the ratio of 18.43x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as AIRAN’s high interest coverage is seen as responsible and safe practice.
Next Steps:
AIRAN has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how AIRAN has been performing in the past. You should continue to research Airan to get a better picture of the stock by looking at: