Uttam Galva Steels Limited (NSEI:UTTAMSTL) is a small-cap stock with a market capitalization of ₹3.18B. 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 UTTAMSTL is loss-making right now, it’s crucial 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. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into UTTAMSTL here.
Does UTTAMSTL generate enough cash through operations?
UTTAMSTL’s debt levels surged from ₹41,657.2M to ₹61,921.6M over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, UTTAMSTL currently has ₹641.0M remaining in cash and short-term investments , ready to deploy into the business. Moreover, UTTAMSTL has produced ₹3,482.1M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 5.62%, indicating that UTTAMSTL’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In UTTAMSTL’s case, it is able to generate 0.06x cash from its debt capital.
Can UTTAMSTL meet its short-term obligations with the cash in hand?
Looking at UTTAMSTL’s most recent ₹69,557.0M 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 0.42x, which is below the prudent industry ratio of 3x.
Does UTTAMSTL face the risk of succumbing to its debt-load?
With total debt exceeding equities, UTTAMSTL is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since UTTAMSTL is presently unprofitable, there’s a question of sustainability of its current operations. 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? UTTAMSTL’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 abreast of market expectations for UTTAMSTL’s future growth on our free analysis platform.