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While small-cap stocks, such as Sterlite Technologies Limited (NSE:STRTECH) with its market cap of ₹71b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into STRTECH here.

STRTECH’s Debt (And Cash Flows)

STRTECH has built up its total debt levels in the last twelve months, from ₹12b to ₹21b , which includes long-term debt. With this rise in debt, STRTECH currently has ₹3.5b remaining in cash and short-term investments , ready to be used for running the business. Moreover, STRTECH has generated ₹6.3b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 31%, indicating that STRTECH’s operating cash is sufficient to cover its debt.

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

At the current liabilities level of ₹41b, it appears that the company may not have an easy time meeting these commitments with a current assets level of ₹40b, leading to a current ratio of 0.96x. The current ratio is calculated by dividing current assets by current liabilities.

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

With total debt exceeding equity, STRTECH is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether STRTECH is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In STRTECH's, case, the ratio of 12.57x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as STRTECH’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although STRTECH’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how STRTECH has been performing in the past. I recommend you continue to research Sterlite Technologies to get a better picture of the stock by looking at:

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

2. Valuation: What is STRTECH worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether STRTECH is currently mispriced by the market.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.