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Investors are always looking for growth in small-cap stocks like Asian Hotels (North) Limited (NSE:ASIANHOTNR), with a market cap of ₹3.71b. However, an important fact which most ignore is: how financially healthy is the business? Since ASIANHOTNR is loss-making right now, it’s essential to assess 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. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into ASIANHOTNR here.
How does ASIANHOTNR’s operating cash flow stack up against its debt?
ASIANHOTNR’s debt level has been constant at around ₹11.41b over the previous year – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at ₹102.9m , ready to deploy into the business. Moreover, ASIANHOTNR has produced ₹1.09b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 9.5%, signalling that ASIANHOTNR’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In ASIANHOTNR’s case, it is able to generate 0.095x cash from its debt capital.
Does ASIANHOTNR’s liquid assets cover its short-term commitments?
Looking at ASIANHOTNR’s most recent ₹3.12b liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.22x.
Is ASIANHOTNR’s debt level acceptable?
With total debt exceeding equities, ASIANHOTNR is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since ASIANHOTNR 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:
With a high level of debt on its balance sheet, ASIANHOTNR could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for ASIANHOTNR to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how ASIANHOTNR has been performing in the past. I suggest you continue to research Asian Hotels (North) to get a better picture of the stock by looking at: