While small-cap stocks, such as Eris Lifesciences Limited (NSE:ERIS) with its market cap of ₹95.85b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Pharmaceuticals industry, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. 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 ERIS here.
Does ERIS produce enough cash relative to debt?
Over the past year, ERIS has ramped up its debt from ₹77.59m to ₹2.74b , which comprises of short- and long-term debt. With this growth in debt, ERIS currently has ₹1.13b remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of ERIS’s operating efficiency ratios such as ROA here.
Can ERIS meet its short-term obligations with the cash in hand?
Looking at ERIS’s most recent ₹2.25b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of ₹2.99b, with a current ratio of 1.32x. For Pharmaceuticals companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can ERIS service its debt comfortably?With a debt-to-equity ratio of 30.95%, ERIS’s debt level may be seen as prudent. This range is considered safe as ERIS is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if ERIS’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 ERIS, the ratio of 28.09x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as ERIS’s high interest coverage is seen as responsible and safe practice.
Although ERIS’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how ERIS has been performing in the past. You should continue to research Eris Lifesciences to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ERIS’s future growth? Take a look at our free research report of analyst consensus for ERIS’s outlook.
- Valuation: What is ERIS 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 ERIS is currently mispriced by the market.
- 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.