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While small-cap stocks, such as Asahi Songwon Colors Limited (NSE:ASAHISONG) with its market cap of ₹3.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about 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 recommend you dig deeper yourself into ASAHISONG here.
How much cash does ASAHISONG generate through its operations?
ASAHISONG has built up its total debt levels in the last twelve months, from ₹313m to ₹634m – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at ₹75m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 assess some of ASAHISONG’s operating efficiency ratios such as ROA here.
Can ASAHISONG pay its short-term liabilities?
Looking at ASAHISONG’s most recent ₹934m liabilities, it seems that the business has been able to meet these commitments with a current assets level of ₹1.5b, leading to a 1.57x current account ratio. For Chemicals companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ASAHISONG face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 34%, ASAHISONG’s debt level may be seen as prudent. This range is considered safe as ASAHISONG is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if ASAHISONG’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 ASAHISONG, the ratio of 9.04x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ASAHISONG’s high interest coverage is seen as responsible and safe practice.
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ASAHISONG’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure ASAHISONG has company-specific issues impacting its capital structure decisions. You should continue to research Asahi Songwon Colors to get a more holistic view of the stock by looking at: