While small-cap stocks, such as Asian Hotels (North) Limited (NSEI:ASIANHOTNR) with its market cap of ₹2.95B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since ASIANHOTNR is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into ASIANHOTNR here.
Does ASIANHOTNR generate an acceptable amount of cash through operations?
ASIANHOTNR has sustained its debt level by about ₹11,543.0M over the last 12 months – 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 ₹150.6M , ready to deploy into the business. Moreover, ASIANHOTNR has produced ₹854.9M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 0.07x, signalling that ASIANHOTNR’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In ASIANHOTNR’s case, it is able to generate 0.07x cash from its debt capital.
Can ASIANHOTNR pay its short-term liabilities?
Looking at ASIANHOTNR’s most recent ₹2,501.4M liabilities, the company is not able to meet these obligations given the level of current assets of ₹564.4M, with a current ratio of 0.23x below the prudent level of 3x.
Is ASIANHOTNR’s level of debt at an acceptable level?
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. Though, since ASIANHOTNR is currently unprofitable, there’s a question of sustainability of its current operations. 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:
Are you a shareholder? ASIANHOTNR’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. In the future, ASIANHOTNR’s financial situation may change. I suggest keeping on top of market expectations for ASIANHOTNR’s future growth on our free analysis platform.