Investors are always looking for growth in small-cap stocks like Sandhar Technologies Limited (NSE:SANDHAR), with a market cap of ₹19.5b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into SANDHAR here.

Does SANDHAR produce enough cash relative to debt?

SANDHAR has built up its total debt levels in the last twelve months, from ₹4.6b to ₹4.8b , which is made up of current and long term debt. With this rise in debt, SANDHAR’s cash and short-term investments stands at ₹2.6b , ready to deploy into the business. Additionally, SANDHAR has generated cash from operations of ₹1.9b in the last twelve months, resulting in an operating cash to total debt ratio of 39%, indicating that SANDHAR’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SANDHAR’s case, it is able to generate 0.39x cash from its debt capital.

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

At the current liabilities level of ₹9.1b liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of ₹7.9b, with a current ratio of 0.87x.

Can SANDHAR service its debt comfortably?

With debt reaching 76% of equity, SANDHAR may be thought of as relatively highly levered. 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 SANDHAR 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 SANDHAR’s, case, the ratio of 3.97x 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.

Next Steps:

SANDHAR’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how SANDHAR has been performing in the past. I suggest you continue to research Sandhar Technologies to get a more holistic view of the stock by looking at: