While small-cap stocks, such as Bannari Amman Spinning Mills Limited (NSEI:BASML) with its market cap of ₹4.99B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into BASML here.
Does BASML generate an acceptable amount of cash through operations?
Over the past year, BASML has ramped up its debt from ₹4,986.9M to ₹5,908.3M – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at ₹241.2M for investing into the business. Moreover, BASML has produced ₹282.5M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 4.78%, signalling that BASML’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BASML’s case, it is able to generate 0.05x cash from its debt capital.
Can BASML pay its short-term liabilities?
Looking at BASML’s most recent ₹4,465.5M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.82x, which is below the prudent industry ratio of 3x.
Is BASML’s level of debt at an acceptable level?
With total debt exceeding equities, BASML is considered a highly levered company. 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 BASML’s case, the ratio of 1.68x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Are you a shareholder? BASML’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. Going forward, its financial position may be different. I suggest researching market expectations for BASML’s future growth on our free analysis platform.