SITI Networks Limited (NSEI:SITINET) is a small-cap stock with a market capitalization of ₹22.50B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Since SITINET is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into SITINET here.
How does SITINET’s operating cash flow stack up against its debt?
SITINET has built up its total debt levels in the last twelve months, from ₹12,605.4M to ₹14,292.4M – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at ₹1,711.0M for investing into the business. On top of this, SITINET has produced ₹1,368.7M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 0.1x, indicating that SITINET’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In SITINET’s case, it is able to generate 0.1x cash from its debt capital.
Can SITINET meet its short-term obligations with the cash in hand?
Looking at SITINET’s most recent ₹11,326.5M liabilities, the company has not been able to meet these commitments with a current assets level of ₹8,545.9M, leading to a 0.75x current account ratio. which is under the appropriate industry ratio of 3x.
Can SITINET service its debt comfortably?
With total debt exceeding equities, SITINET 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. Though, since SITINET is presently unprofitable, 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? SITINET’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. Going forward, SITINET’s financial situation may change. I suggest keeping on top of market expectations for SITINET’s future growth on our free analysis platform.