While small-cap stocks, such as Sarla Performance Fibers Limited (NSE:SARLAPOLY) with its market cap of ₹2.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into SARLAPOLY here.
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SARLAPOLY’s Debt (And Cash Flows)
SARLAPOLY's debt levels have fallen from ₹2.6b to ₹2.2b over the last 12 months – this includes long-term debt. With this debt payback, SARLAPOLY's cash and short-term investments stands at ₹223m , ready to be used for running the business. On top of this, SARLAPOLY has generated cash from operations of ₹490m over the same time period, resulting in an operating cash to total debt ratio of 22%, meaning that SARLAPOLY’s debt is appropriately covered by operating cash.
Does SARLAPOLY’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹1.4b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.45x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Luxury companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SARLAPOLY service its debt comfortably?
With a debt-to-equity ratio of 80%, SARLAPOLY can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SARLAPOLY's case, the ratio of 55.69x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
SARLAPOLY’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around SARLAPOLY's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how SARLAPOLY has been performing in the past. You should continue to research Sarla Performance Fibers to get a more holistic view of the small-cap by looking at:
- Valuation: What is SARLAPOLY 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 SARLAPOLY is currently mispriced by the market.
- Historical Performance: What has SARLAPOLY'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.
- 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.