While small-cap stocks, such as Ess Dee Aluminium Limited (NSEI:ESSDEE) with its market cap of ₹1.89B, 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 ESSDEE is loss-making right now, it’s crucial 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. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into ESSDEE here.
Does ESSDEE generate an acceptable amount of cash through operations?
Over the past year, ESSDEE has ramped up its debt from ₹6,799.4M to ₹8,612.0M – this includes both the current and long-term debt. With this rise in debt, ESSDEE’s cash and short-term investments stands at ₹10.3M , ready to deploy into the business. However, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of ESSDEE’s operating efficiency ratios such as ROA here.
Does ESSDEE’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹10,612.2M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of ₹321.4M, leading to a 0.03x current account ratio. which is under the appropriate industry ratio of 3x.
Does ESSDEE face the risk of succumbing to its debt-load?
With total debt exceeding equities, ESSDEE 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. However, since ESSDEE 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? ESSDEE’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 not be able to pay all of its upcoming liabilities from its current short-term assets. In the future, ESSDEE’s financial situation may change. I suggest keeping abreast of market expectations for ESSDEE’s future growth on our free analysis platform.