Investors are always looking for growth in small-cap stocks like Sterling Biotech Limited (NSEI:STERLINBIO), with a market cap of ₹451.80M. However, an important fact which most ignore is: how financially healthy is the business? Pharmaceuticals companies, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into STERLINBIO here.
Does STERLINBIO generate an acceptable amount of cash through operations?
STERLINBIO’s debt levels surged from ₹65.68B to ₹69.49B over the last 12 months – this includes both the current and long-term debt. With this growth in debt, STERLINBIO currently has ₹227.36M remaining in cash and short-term investments , ready to deploy into the business. Moreover, STERLINBIO has generated cash from operations of ₹9.49M over the same time period, leading to an operating cash to total debt ratio of 0.014%, meaning that STERLINBIO’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In STERLINBIO’s case, it is able to generate 0.00014x cash from its debt capital.
Can STERLINBIO meet its short-term obligations with the cash in hand?
Looking at STERLINBIO’s most recent ₹30.87B liabilities, it appears that the company has not been able to meet these commitments with a current assets level of ₹10.83B, leading to a 0.35x current account ratio. which is under the appropriate industry ratio of 3x.
Is STERLINBIO’s debt level acceptable?
With total debt exceeding equities, STERLINBIO is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since STERLINBIO is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
STERLINBIO’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for STERLINBIO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Sterling Biotech to get a more holistic view of the stock by looking at: