Investors are always looking for growth in small-cap stocks like Hotel Leelaventure Limited (NSEI:HOTELEELA), with a market cap of ₹13.18B. However, an important fact which most ignore is: how financially healthy is the business? Since HOTELEELA is loss-making right now, it’s vital to assess 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into HOTELEELA here.

Does HOTELEELA generate enough cash through operations?

Over the past year, HOTELEELA has maintained its debt levels at around ₹41,890.6M – this includes both the current and long-term debt. At this constant level of debt, HOTELEELA currently has ₹477.6M remaining in cash and short-term investments for investing into the business. Additionally, HOTELEELA has produced cash from operations of ₹1,951.3M over the same time period, resulting in an operating cash to total debt ratio of 4.66%, meaning that HOTELEELA’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 HOTELEELA’s case, it is able to generate 0.05x cash from its debt capital.

Can HOTELEELA meet its short-term obligations with the cash in hand?

Looking at HOTELEELA’s most recent ₹6,093.4M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.32x, which is below the prudent industry ratio of 3x.

Does HOTELEELA face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, HOTELEELA is a highly leveraged 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 HOTELEELA is presently unprofitable, sustainability of its current state of operations becomes a concern. 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? HOTELEELA’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, its financial position may change. You should always be researching market expectations for HOTELEELA’s future growth on our free analysis platform.

Are you a potential investor? HOTELEELA’s large debt ratio on top of poor cash coverage in addition to low liquidity coverage of near-term obligations may scare some investors away intially. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of HOTELEELA’s track record. You should continue your analysis by taking a look at HOTELEELA’s past performance analysis on our free platform to figure out HOTELEELA’s financial health position.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.