Uttam Galva Steels Limited (NSEI:UTTAMSTL) is a small-cap stock with a market capitalization of ₹1.71B. 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? Given that UTTAMSTL is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into UTTAMSTL here.
How does UTTAMSTL’s operating cash flow stack up against its debt?
UTTAMSTL’s debt levels surged from ₹41.66B to ₹61.92B over the last 12 months , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at ₹641.00M for investing into the business. Moreover, UTTAMSTL has generated cash from operations of ₹3.48B in the last twelve months, resulting in an operating cash to total debt ratio of 5.62%, signalling that UTTAMSTL’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In UTTAMSTL’s case, it is able to generate 0.056x cash from its debt capital.
Does UTTAMSTL’s liquid assets cover its short-term commitments?
Looking at UTTAMSTL’s most recent ₹69.56B liabilities, it appears that the company has not been able to meet these commitments with a current assets level of ₹29.20B, leading to a 0.42x current account ratio. which is under the appropriate industry ratio of 3x.
Can UTTAMSTL service its debt comfortably?
With total debt exceeding equities, UTTAMSTL 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. But since UTTAMSTL is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
With a high level of debt on its balance sheet, UTTAMSTL 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 UTTAMSTL 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 UTTAMSTL’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Uttam Galva Steels to get a more holistic view of the stock by looking at: