Sathavahana Ispat Limited (NSEI:SATHAISPAT) is a small-cap stock with a market capitalization of ₹956.92M. 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? Since SATHAISPAT is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into SATHAISPAT here.

Does SATHAISPAT generate an acceptable amount of cash through operations?

SATHAISPAT has sustained its debt level by about ₹6.52B over the last 12 months made up of current and long term debt. At this constant level of debt, SATHAISPAT currently has ₹899.73M remaining in cash and short-term investments for investing into the business. Moreover, SATHAISPAT has generated cash from operations of ₹1.34B during the same period of time, leading to an operating cash to total debt ratio of 20.52%, meaning that SATHAISPAT’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In SATHAISPAT’s case, it is able to generate 0.21x cash from its debt capital.

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

Looking at SATHAISPAT’s most recent ₹9.01B liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.52x, which is below the prudent industry ratio of 3x.

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

SATHAISPAT is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since SATHAISPAT is currently unprofitable, sustainability of its current state of operations becomes a concern. 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, SATHAISPAT 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 SATHAISPAT to increase its operational efficiency. In addition to this, 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 SATHAISPAT has been performing in the past. You should continue to research Sathavahana Ispat to get a better picture of the stock by looking at: