Investors are always looking for growth in small-cap stocks like Shalimar Paints Limited (NSEI:SHALPAINTS), with a market cap of ₹3.78B. However, an important fact which most ignore is: how financially healthy is the business? Since SHALPAINTS is loss-making right now, it’s essential 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. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SHALPAINTS here.
How does SHALPAINTS’s operating cash flow stack up against its debt?
SHALPAINTS has sustained its debt level by about ₹1,707.6M over the last 12 months comprising of short- and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at ₹194.9M for investing into the business. Additionally, SHALPAINTS has produced ₹295.7M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 17.32%, meaning that SHALPAINTS’s operating cash is not sufficient to cover its debt. 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 a positive net income. In SHALPAINTS’s case, it is able to generate 0.17x cash from its debt capital.
Can SHALPAINTS pay its short-term liabilities?
With current liabilities at ₹2,972.8M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.97x, which is below the prudent industry ratio of 3x.
Can SHALPAINTS service its debt comfortably?
Since total debt levels have outpaced equities, SHALPAINTS 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 SHALPAINTS is presently 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? SHALPAINTS’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 struggle to meet its near term liabilities should an adverse event occur. In the future, SHALPAINTS’s financial situation may change. You should always be researching market expectations for SHALPAINTS’s future growth on our free analysis platform.