In This Article:
Sundaram Multi Pap Limited (NSE:SUNDARAM) is a small-cap stock with a market capitalization of ₹592m. 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 SUNDARAM is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SUNDARAM here.
Does SUNDARAM produce enough cash relative to debt?
SUNDARAM has shrunken its total debt levels in the last twelve months, from ₹668m to ₹587m , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at ₹3m , ready to deploy into the business. On top of this, SUNDARAM has generated cash from operations of ₹47m over the same time period, resulting in an operating cash to total debt ratio of 8.0%, signalling that SUNDARAM’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In SUNDARAM’s case, it is able to generate 0.08x cash from its debt capital.
Can SUNDARAM pay its short-term liabilities?
At the current liabilities level of ₹723m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.31x. For Forestry companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can SUNDARAM service its debt comfortably?
With a debt-to-equity ratio of 84%, SUNDARAM can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since SUNDARAM is currently unprofitable, 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:
SUNDARAM’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure SUNDARAM has company-specific issues impacting its capital structure decisions. You should continue to research Sundaram Multi Pap to get a more holistic view of the stock by looking at: