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Investors are always looking for growth in small-cap stocks like Galaxy Surfactants Limited (NSEI:GALAXYSURF), with a market cap of IN₨59.05B. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, 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. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into GALAXYSURF here.
Does GALAXYSURF generate an acceptable amount of cash through operations?
GALAXYSURF has sustained its debt level by about IN₨3.94B over the last 12 months made up of current and long term debt. At this current level of debt, the current cash and short-term investment levels stands at IN₨254.04M for investing into the business. Moreover, GALAXYSURF has generated cash from operations of IN₨1.13B in the last twelve months, leading to an operating cash to total debt ratio of 28.61%, indicating that GALAXYSURF’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GALAXYSURF’s case, it is able to generate 0.29x cash from its debt capital.
Does GALAXYSURF’s liquid assets cover its short-term commitments?
With current liabilities at IN₨5.49B, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.38x. Usually, for Chemicals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is GALAXYSURF’s debt level acceptable?
With a debt-to-equity ratio of 68.89%, GALAXYSURF can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether GALAXYSURF 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 GALAXYSURF’s, case, the ratio of 11.07x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving GALAXYSURF ample headroom to grow its debt facilities.
Next Steps:
Although GALAXYSURF’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure GALAXYSURF has company-specific issues impacting its capital structure decisions. You should continue to research Galaxy Surfactants to get a better picture of the small-cap by looking at: