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Surya Roshni Limited (NSE:SURYAROSNI) is a small-cap stock with a market capitalization of ₹11.9b. 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? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into SURYAROSNI here.
Does SURYAROSNI produce enough cash relative to debt?
SURYAROSNI’s debt levels surged from ₹8.9b to ₹11.0b over the last 12 months – this includes both the current and long-term debt. With this rise in debt, SURYAROSNI currently has ₹241m remaining in cash and short-term investments for investing into the business. Additionally, SURYAROSNI has produced ₹1.5b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 14%, indicating that SURYAROSNI’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 SURYAROSNI’s case, it is able to generate 0.14x cash from its debt capital.
Does SURYAROSNI’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹13.1b liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹17.5b, with a current ratio of 1.33x. Generally, for Metals and Mining companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does SURYAROSNI face the risk of succumbing to its debt-load?
With total debt exceeding equities, SURYAROSNI is considered a highly levered company. 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 SURYAROSNI’s case, the ratio of 2.71x 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.