Strides Pharma Science Limited (NSE:STAR) is a small-cap stock with a market capitalization of ₹38.5b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Pharmaceuticals industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into STAR here.
Does STAR produce enough cash relative to debt?
Over the past year, STAR has reduced its debt from ₹40.3b to ₹28.7b , which is made up of current and long term debt. With this debt payback, STAR currently has ₹6.8b remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of STAR’s operating efficiency ratios such as ROA here.
Can STAR pay its short-term liabilities?
Looking at STAR’s most recent ₹22.2b liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.26x. Generally, for Pharmaceuticals companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does STAR face the risk of succumbing to its debt-load?
STAR is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 STAR’s case, the ratio of 3.16x suggests that interest is appropriately 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.
STAR’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. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure STAR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Strides Pharma Science to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for STAR’s future growth? Take a look at our free research report of analyst consensus for STAR’s outlook.
- Valuation: What is STAR 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 STAR 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.