APL Apollo Tubes Limited (NSEI:APLAPOLLO) is a small-cap stock with a market capitalization of ₹45.82B. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. 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 recommend you dig deeper yourself into APLAPOLLO here.
Does APLAPOLLO generate an acceptable amount of cash through operations?
APLAPOLLO has shrunken its total debt levels in the last twelve months, from ₹6,505.5M to ₹5,961.8M , which comprises of short- and long-term debt. With this reduction in debt, APLAPOLLO currently has ₹16.8M remaining in cash and short-term investments , ready to deploy into the business. Moreover, APLAPOLLO has generated ₹3,383.8M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 0.57x, signalling that APLAPOLLO’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In APLAPOLLO’s case, it is able to generate 0.57x cash from its debt capital.
Can APLAPOLLO meet its short-term obligations with the cash in hand?
Looking at APLAPOLLO’s most recent ₹9,260.5M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of ₹9,008.2M, with a current ratio of 0.97x below the prudent level of 3x.
Is APLAPOLLO’s level of debt at an acceptable level?
With a debt-to-equity ratio of 89.40%, APLAPOLLO can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether APLAPOLLO is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In APLAPOLLO’s, case, the ratio of 4.38x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as APLAPOLLO’s high interest coverage is seen as responsible and safe practice.