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Investors are always looking for growth in small-cap stocks like Sutlej Textiles and Industries Limited (NSE:SUTLEJTEX), with a market cap of ₹7.2b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SUTLEJTEX here.
Does SUTLEJTEX produce enough cash relative to debt?
Over the past year, SUTLEJTEX has maintained its debt levels at around ₹10.5b comprising of short- and long-term debt. At this constant level of debt, SUTLEJTEX’s cash and short-term investments stands at ₹134m , ready to deploy into the business. On top of this, SUTLEJTEX has generated ₹1.6b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 15%, meaning that SUTLEJTEX’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SUTLEJTEX’s case, it is able to generate 0.15x cash from its debt capital.
Does SUTLEJTEX’s liquid assets cover its short-term commitments?
With current liabilities at ₹7.3b, it appears that the company has been able to meet these commitments with a current assets level of ₹10.0b, leading to a 1.38x current account ratio. Generally, for Luxury companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does SUTLEJTEX face the risk of succumbing to its debt-load?
SUTLEJTEX is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SUTLEJTEX’s case, the ratio of 3.76x 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.
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At its current level of cash flow coverage, SUTLEJTEX has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure SUTLEJTEX has company-specific issues impacting its capital structure decisions. I suggest you continue to research Sutlej Textiles and Industries to get a better picture of the stock by looking at: