While small-cap stocks, such as SORIL Infra Resources Limited (NSE:SORILINFRA) with its market cap of ₹7.47b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into SORILINFRA here.
Does SORILINFRA produce enough cash relative to debt?
SORILINFRA's debt levels surged from ₹753.70m to ₹2.91b over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at ₹110.04m , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of SORILINFRA’s operating efficiency ratios such as ROA here.
Can SORILINFRA pay its short-term liabilities?
Looking at SORILINFRA’s most recent ₹3.35b liabilities, it seems that the business is not able to meet these obligations given the level of current assets of ₹1.83b, with a current ratio of 0.55x below the prudent level of 3x.
Does SORILINFRA face the risk of succumbing to its debt-load?Since total debt levels have outpaced equities, SORILINFRA 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. 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 after interest and tax at least three times its net interest payments is considered financially sound. In SORILINFRA's case, the ratio of 0.88x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
SORILINFRA’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, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how SORILINFRA has been performing in the past. You should continue to research SORIL Infra Resources to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SORILINFRA’s future growth? Take a look at our free research report of analyst consensus for SORILINFRA’s outlook.
- Historical Performance: What has SORILINFRA'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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