Is Ess Dee Aluminium Limited’s (NSE:ESSDEE) Balance Sheet A Threat To Its Future?
Ess Dee Aluminium Limited (NSEI:ESSDEE) is a small-cap stock with a market capitalization of ₹1.53B. 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? Given that ESSDEE is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into ESSDEE here.
Does ESSDEE generate enough cash through operations?
Over the past year, ESSDEE has ramped up its debt from ₹6.80B to ₹8.61B , which comprises of short- and long-term debt. With this increase in debt, ESSDEE currently has ₹10.27M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of ESSDEE’s operating efficiency ratios such as ROA here.
Can ESSDEE meet its short-term obligations with the cash in hand?
Looking at ESSDEE’s most recent ₹10.61B liabilities, it seems that the business has not been able to meet these commitments with a current assets level of ₹321.40M, leading to a 0.03x current account ratio. which is under the appropriate industry ratio of 3x.
Is ESSDEE’s debt level acceptable?
Since total debt levels have outpaced equities, ESSDEE 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. However, since ESSDEE is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
ESSDEE’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure ESSDEE has company-specific issues impacting its capital structure decisions. You should continue to research Ess Dee Aluminium to get a more holistic view of the stock by looking at:
1. Valuation: What is ESSDEE 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 ESSDEE is currently mispriced by the market.
2. Historical Performance: What has ESSDEE’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.
To help readers see pass 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.
