While small-cap stocks, such as Sterling Biotech Limited (NSEI:STERLINBIO) with its market cap of ₹892.72M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the pharmaceuticals industry, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into STERLINBIO here.
Does STERLINBIO generate enough cash through operations?
STERLINBIO’s debt levels surged from ₹65,675.4M to ₹69,490.1M over the last 12 months , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at ₹227.4M for investing into the business. On top of this, STERLINBIO has produced ₹9.5M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 0.01%, signalling that STERLINBIO’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In STERLINBIO’s case, it is able to generate 0x cash from its debt capital.
Can STERLINBIO meet its short-term obligations with the cash in hand?
Looking at STERLINBIO’s most recent ₹30,874.8M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of ₹10,834.2M, leading to a 0.35x current account ratio. which is under the appropriate industry ratio of 3x.
Is STERLINBIO’s level of debt at an acceptable level?
With total debt exceeding equities, STERLINBIO 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. Though, since STERLINBIO is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? STERLINBIO’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. Moving forward, its financial position may change. I suggest researching market expectations for STERLINBIO’s future growth on our free analysis platform.