Is S K S Textiles Limited (NSE:SKSTEXTILE) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like S K S Textiles Limited (NSE:SKSTEXTILE), with a market cap of ₹128.58m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into SKSTEXTILE here.

Does SKSTEXTILE produce enough cash relative to debt?

Over the past year, SKSTEXTILE has maintained its debt levels at around ₹474.43m made up of current and long term debt. At this constant level of debt, the current cash and short-term investment levels stands at ₹17.76m , ready to deploy into the business. Moreover, SKSTEXTILE has produced ₹29.83m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 6.29%, indicating that SKSTEXTILE’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SKSTEXTILE’s case, it is able to generate 0.063x cash from its debt capital.

Can SKSTEXTILE pay its short-term liabilities?

At the current liabilities level of ₹651.01m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ₹830.06m, with a current ratio of 1.28x. Generally, for Luxury companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is SKSTEXTILE’s debt level acceptable?

Since total debt levels have outpaced equities, SKSTEXTILE is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if SKSTEXTILE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SKSTEXTILE, the ratio of 1.24x 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.

Next Steps:

SKSTEXTILE’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how SKSTEXTILE has been performing in the past. You should continue to research S K S Textiles to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for SKSTEXTILE’s future growth? Take a look at our free research report of analyst consensus for SKSTEXTILE’s outlook.
2. Historical Performance: What has SKSTEXTILE'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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.