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While small-cap stocks, such as Unitech Limited (NSE:UNITECH) with its market cap of ₹11.56b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that UNITECH is not presently profitable, it’s vital to evaluate 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. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into UNITECH here.
How much cash does UNITECH generate through its operations?
UNITECH has shrunken its total debt levels in the last twelve months, from ₹64.83b to ₹32.45b – this includes both the current and long-term debt. With this reduction in debt, UNITECH’s cash and short-term investments stands at ₹864.96m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of UNITECH’s operating efficiency ratios such as ROA here.
Can UNITECH pay its short-term liabilities?
With current liabilities at ₹169.93b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. Usually, for Real Estate companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is UNITECH’s debt level acceptable?
With debt reaching 42.29% of equity, UNITECH may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since UNITECH is currently loss-making, 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:
UNITECH’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure UNITECH has company-specific issues impacting its capital structure decisions. I recommend you continue to research Unitech to get a better picture of the stock by looking at: