While small-cap stocks, such as Shree Ram Protiens Limited (NSE:SRPL) with its market cap of ₹557m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I recommend you dig deeper yourself into SRPL here.
Does SRPL produce enough cash relative to debt?
SRPL’s debt level has been constant at around ₹467m over the previous year – this includes both the current and long-term debt. At this constant level of debt, SRPL currently has ₹4m remaining in cash and short-term investments , ready to deploy 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. For this article’s sake, I won’t be looking at this today, but you can examine some of SRPL’s operating efficiency ratios such as ROA here.
Can SRPL meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹553m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.83x. Generally, for Food companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can SRPL service its debt comfortably?
Since total debt levels have outpaced equities, SRPL is a highly leveraged 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 test if SRPL’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SRPL, the ratio of 1.87x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SRPL’s low interest coverage already puts the company at higher risk of default.
Next Steps:
At its current level of cash flow coverage, SRPL has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for SRPL’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Shree Ram Protiens to get a more holistic view of the stock by looking at: