Investors are always looking for growth in small-cap stocks like Solex Energy Limited (NSE:SOLEX), with a market cap of ₹153m. However, an important fact which most ignore is: how financially healthy is the business? Semiconductor companies, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into SOLEX here.
How does SOLEX’s operating cash flow stack up against its debt?
SOLEX’s debt levels surged from ₹12m to ₹63m over the last 12 months , which accounts for long term debt. With this rise in debt, SOLEX’s cash and short-term investments stands at ₹1.9m , 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. 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 SOLEX’s operating efficiency ratios such as ROA here.
Does SOLEX’s liquid assets cover its short-term commitments?
At the current liabilities level of ₹351m, it seems that the business has been able to meet these obligations given the level of current assets of ₹507m, with a current ratio of 1.44x. Usually, for Semiconductor companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can SOLEX service its debt comfortably?
With debt reaching 46% of equity, SOLEX may be thought of as relatively highly levered. 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 SOLEX’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 SOLEX, the ratio of 15.43x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SOLEX ample headroom to grow its debt facilities.
Next Steps:
SOLEX’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. Since there is also no concerns around SOLEX’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SOLEX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Solex Energy to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SOLEX’s future growth? Take a look at our free research report of analyst consensus for SOLEX’s outlook.
- Historical Performance: What has SOLEX’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.
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 editorial-team@simplywallst.com.