While small-cap stocks, such as Shreyas Shipping and Logistics Limited (NSEI:SHREYAS) with its market cap of IN₨12.27B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into SHREYAS here.
Does SHREYAS generate enough cash through operations?
SHREYAS has shrunken its total debt levels in the last twelve months, from IN₨2.05B to IN₨1.77B , which comprises of short- and long-term debt. With this debt payback, SHREYAS currently has IN₨179.84M remaining in cash and short-term investments , ready to deploy into the business. Moreover, SHREYAS has generated cash from operations of IN₨521.28M over the same time period, resulting in an operating cash to total debt ratio of 29.40%, meaning that SHREYAS’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 SHREYAS’s case, it is able to generate 0.29x cash from its debt capital.
Can SHREYAS pay its short-term liabilities?
Looking at SHREYAS’s most recent IN₨1.23B liabilities, it appears that the company has been able to meet these commitments with a current assets level of IN₨1.52B, leading to a 1.24x current account ratio. Usually, for Shipping companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SHREYAS’s debt level acceptable?
With debt reaching 67.08% of equity, SHREYAS 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 SHREYAS’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 SHREYAS, the ratio of 5.27x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SHREYAS’s high interest coverage is seen as responsible and safe practice.
Although SHREYAS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around SHREYAS’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure SHREYAS has company-specific issues impacting its capital structure decisions. You should continue to research Shreyas Shipping and Logistics to get a better picture of the small-cap by looking at:
- 1. Historical Performance: What has SHREYAS’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.
- 2. 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.