Investors are always looking for growth in small-cap stocks like Shivam Autotech Limited (NSE:SHIVAMAUTO), with a market cap of ₹6.05b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SHIVAMAUTO here.

How does SHIVAMAUTO’s operating cash flow stack up against its debt?

SHIVAMAUTO has built up its total debt levels in the last twelve months, from ₹3.05b to ₹0 , which is made up of current and long term debt. With this rise in debt, SHIVAMAUTO’s cash and short-term investments stands at ₹46.55m for investing into the business. On top of this, SHIVAMAUTO has produced ₹664.57m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 16.60%, indicating that SHIVAMAUTO’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SHIVAMAUTO’s case, it is able to generate 0.17x cash from its debt capital.

Does SHIVAMAUTO’s liquid assets cover its short-term commitments?

Looking at SHIVAMAUTO’s most recent ₹2.66b liabilities, the company has not been able to meet these commitments with a current assets level of ₹2.17b, leading to a 0.81x current account ratio. which is under the appropriate industry ratio of 3x.

Can SHIVAMAUTO service its debt comfortably?

SHIVAMAUTO 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SHIVAMAUTO’s case, the ratio of 0.93x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

With a high level of debt on its balance sheet, SHIVAMAUTO 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 SHIVAMAUTO to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for SHIVAMAUTO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Shivam Autotech to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for SHIVAMAUTO’s future growth? Take a look at our free research report of analyst consensus for SHIVAMAUTO’s outlook.

2. Historical Performance: What has SHIVAMAUTO’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.