Is Sri Krishna Metcom Limited's (NSE:SKML) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like Sri Krishna Metcom Limited (NSE:SKML), with a market cap of ₹750.31m. 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. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into SKML here.

How much cash does SKML generate through its operations?

SKML's debt level has been constant at around ₹182.50m over the previous year made up of current and long term debt. At this constant level of debt, the current cash and short-term investment levels stands at ₹3.89m , ready to deploy into the business. Additionally, SKML has produced ₹59.31m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 32.50%, signalling that SKML’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SKML’s case, it is able to generate 0.32x cash from its debt capital.

Can SKML pay its short-term liabilities?

At the current liabilities level of ₹167.35m liabilities, it appears that the company has been able to meet these commitments with a current assets level of ₹168.22m, leading to a 1.01x current account ratio. Usually, for Food companies, this is a suitable ratio as there's enough of a cash buffer without holding too capital in low return investments.

Is SKML’s debt level acceptable?

Since total debt levels have outpaced equities, SKML 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. We can check to see whether SKML is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SKML's, case, the ratio of 1.97x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

SKML’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how SKML has been performing in the past. You should continue to research Sri Krishna Metcom to get a more holistic view of the small-cap by looking at:

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