While small-cap stocks, such as Aakash Exploration Services Limited (NSEI:AAKASH) with its market cap of ₹377.66M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Energy Services companies, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into AAKASH here.
How does AAKASH’s operating cash flow stack up against its debt?
AAKASH has built up its total debt levels in the last twelve months, from ₹132.68M to ₹145.14M – this includes both the current and long-term debt. With this rise in debt, AAKASH’s cash and short-term investments stands at ₹30.40M for investing into the business. Additionally, AAKASH has produced ₹50.67M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 34.91%, signalling that AAKASH’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AAKASH’s case, it is able to generate 0.35x cash from its debt capital.
Does AAKASH’s liquid assets cover its short-term commitments?
With current liabilities at ₹73.50M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.72x. Generally, for Energy Services companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does AAKASH face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 85.52%, AAKASH can be considered as an above-average leveraged company. 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 AAKASH’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 AAKASH, the ratio of 2.35x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as AAKASH’s low interest coverage already puts the company at higher risk of default.
Although AAKASH’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how AAKASH has been performing in the past. I recommend you continue to research Aakash Exploration Services to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has AAKASH’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 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.