While small-cap stocks, such as Assam Company India Limited (NSEI:ASSAMCO) with its market cap of ₹1.78B, 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 ASSAMCO is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into ASSAMCO here.
Does ASSAMCO generate an acceptable amount of cash through operations?
Over the past year, ASSAMCO has maintained its debt levels at around ₹8,909.9M made up of current and long term debt. At this current level of debt, ASSAMCO’s cash and short-term investments stands at ₹120.1M for investing into the business. On top of this, ASSAMCO has produced cash from operations of ₹719.6M during the same period of time, resulting in an operating cash to total debt ratio of 8.08%, indicating that ASSAMCO’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In ASSAMCO’s case, it is able to generate 0.08x cash from its debt capital.
Can ASSAMCO meet its short-term obligations with the cash in hand?
With current liabilities at ₹8,951.2M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of ₹1,406.3M, leading to a 0.16x current account ratio. which is under the appropriate industry ratio of 3x.
Is ASSAMCO’s level of debt at an acceptable level?
With total debt exceeding equities, ASSAMCO 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 ASSAMCO is currently loss-making, 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? ASSAMCO’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 not be able to pay all of its upcoming liabilities from its current short-term assets. In the future, its financial position may be different. I suggest keeping on top of market expectations for ASSAMCO’s future growth on our free analysis platform.