Soni Soya Products Limited (NSEI:SONISOYA) is a small-cap stock with a market capitalization of ₹118.56M. 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into SONISOYA here.
Does SONISOYA generate enough cash through operations?
SONISOYA has built up its total debt levels in the last twelve months, from ₹6.85M to ₹50.86M – this includes both the current and long-term debt. With this growth in debt, SONISOYA’s cash and short-term investments stands at ₹1.89M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of SONISOYA’s operating efficiency ratios such as ROA here.
Does SONISOYA’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹138.00M 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 1.09x. Generally, for Food 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 SONISOYA face the risk of succumbing to its debt-load?
With total debt exceeding equities, SONISOYA is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether SONISOYA 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 SONISOYA’s, case, the ratio of 3.29x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.