Sun Pharma Advanced Research Company Limited (NSEI:SPARC) is a small-cap stock with a market capitalization of ₹106.03B. 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? Pharmaceuticals companies, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into SPARC here.

Does SPARC generate enough cash through operations?

SPARC’s debt levels have fallen from ₹557.48M to ₹31.37M over the last 12 months , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at ₹798.60M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 SPARC’s operating efficiency ratios such as ROA here.

Can SPARC pay its short-term liabilities?

Looking at SPARC’s most recent ₹1.08B liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.47x. Generally, for Pharmaceuticals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

Does SPARC face the risk of succumbing to its debt-load?

With debt at 1.16% of equity, SPARC may be thought of as having low leverage. This range is considered safe as SPARC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is extremely low for SPARC, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

SPARC’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure SPARC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Sun Pharma Advanced Research to get a more holistic view of the stock by looking at: