While small-cap stocks, such as Harrisons Malayalam Limited (NSEI:HARRMALAYA) with its market cap of ₹1.74B, 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 HARRMALAYA is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into HARRMALAYA here.
How does HARRMALAYA’s operating cash flow stack up against its debt?
HARRMALAYA has shrunken its total debt levels in the last twelve months, from ₹1,121.9M to ₹952.2M , which is made up of current and long term debt. With this reduction in debt, HARRMALAYA’s cash and short-term investments stands at ₹29.0M , ready to deploy into the business. Moreover, HARRMALAYA has produced cash from operations of ₹157.9M over the same time period, resulting in an operating cash to total debt ratio of 0.17x, signalling that HARRMALAYA’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In HARRMALAYA’s case, it is able to generate 0.17x cash from its debt capital.
Can HARRMALAYA meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹1,749.0M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of ₹678.3M, leading to a 0.39x current account ratio. which is under the appropriate industry ratio of 3x.
Can HARRMALAYA service its debt comfortably?
With a debt-to-equity ratio of 98.99%, HARRMALAYA can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since HARRMALAYA is presently loss-making, sustainability of its current state of operations becomes a concern. 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? With a high level of debt on its balance sheet, HARRMALAYA could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for HARRMALAYA to increase its operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may be different. You should always be keeping on top of market expectations for HARRMALAYA’s future growth on our free analysis platform.