While small-cap stocks, such as Gyscoal Alloys Limited (NSEI:GAL) with its market cap of ₹1.21B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that GAL is not presently profitable, it’s crucial to assess 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, this commentary is still very high-level, so I recommend you dig deeper yourself into GAL here.
Does GAL generate enough cash through operations?
GAL’s debt levels surged from ₹957.3M to ₹1,011.8M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹29.3M for investing into the business. On top of this, GAL has generated ₹79.0M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 7.81%, indicating that GAL’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 companies as traditional metrics such as return on asset (ROA) requires a positive net income. In GAL’s case, it is able to generate 0.08x cash from its debt capital.
Does GAL’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹1,407.0M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.42x. Generally, for metals and mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does GAL face the risk of succumbing to its debt-load?
With total debt exceeding equities, GAL 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. But since GAL is presently loss-making, 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? GAL’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that GAL’s financial situation may change. I recommend keeping on top of market expectations for GAL’s future growth on our free analysis platform.