While small-cap stocks, such as GI Engineering Solutions Limited (NSE:GISOLUTION) with its market cap of ₹21m, 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 GISOLUTION is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into GISOLUTION here.

GISOLUTION’s Debt (And Cash Flows)

GISOLUTION's debt levels have fallen from ₹70m to ₹34m over the last 12 months made up of predominantly near term debt. With this debt payback, GISOLUTION currently has ₹208k remaining in cash and short-term investments to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of GISOLUTION’s operating efficiency ratios such as ROA here.

Can GISOLUTION pay its short-term liabilities?

At the current liabilities level of ₹73m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.97x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Construction companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can GISOLUTION service its debt comfortably?

With debt reaching 43% of equity, GISOLUTION may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since GISOLUTION 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:

Although GISOLUTION’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around GISOLUTION's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for GISOLUTION's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research GI Engineering Solutions to get a more holistic view of the small-cap by looking at:

1. Historical Performance: What has GISOLUTION'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.

2. 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.

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