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Sify Technologies Limited (NASDAQ:SIFY) is a small-cap stock with a market capitalization of US$205m. 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? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into SIFY here.
Does SIFY Produce Much Cash Relative To Its Debt?
Over the past year, SIFY has ramped up its debt from ₹5.8b to ₹8.3b , which accounts for long term debt. With this rise in debt, SIFY's cash and short-term investments stands at ₹1.9b , ready to be used for running the business. On top of this, SIFY has generated ₹1.4b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 17%, indicating that SIFY’s operating cash is less than its debt.
Can SIFY meet its short-term obligations with the cash in hand?
At the current liabilities level of ₹14b, it appears that the company has been able to meet these obligations given the level of current assets of ₹17b, with a current ratio of 1.19x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Telecom companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can SIFY service its debt comfortably?
SIFY is a relatively highly levered company with a debt-to-equity of 77%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if SIFY’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 SIFY, the ratio of 2.99x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although SIFY’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 SIFY's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SIFY's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Sify Technologies to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SIFY’s future growth? Take a look at our free research report of analyst consensus for SIFY’s outlook.
- Historical Performance: What has SIFY'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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.