Asian Hotels (East) Limited (NSE:AHLEAST) is a small-cap stock with a market capitalization of ₹2.8b. 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? Given that AHLEAST is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into AHLEAST here.

AHLEAST’s Debt (And Cash Flows)

AHLEAST’s debt level has been constant at around ₹1.4b over the previous year which accounts for long term debt. At this current level of debt, AHLEAST’s cash and short-term investments stands at ₹672m , ready to be used for running the business. Moreover, AHLEAST has produced cash from operations of ₹183m during the same period of time, leading to an operating cash to total debt ratio of 13%, meaning that AHLEAST’s current level of operating cash is not high enough to cover debt.

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

Looking at AHLEAST’s ₹724m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of ₹998m, leading to a 1.38x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Hospitality companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can AHLEAST service its debt comfortably?

With debt at 18% of equity, AHLEAST may be thought of as appropriately levered. AHLEAST is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. AHLEAST’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

AHLEAST’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for AHLEAST’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Asian Hotels (East) to get a more holistic view of the stock by looking at:

1. Valuation: What is AHLEAST worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AHLEAST is currently mispriced by the market.

2. Historical Performance: What has AHLEAST’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.