Beta Drugs Limited (NSEI:BETA) is a small-cap stock with a market capitalization of ₹1.24B. 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? Companies operating in the Pharmaceuticals industry, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into BETA here.
How does BETA’s operating cash flow stack up against its debt?
BETA has sustained its debt level by about ₹82.08M over the last 12 months comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at ₹1.44M for investing into the business. Moreover, BETA has produced ₹30.26M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 36.87%, meaning that BETA’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 BETA’s case, it is able to generate 0.37x cash from its debt capital.
Can BETA meet its short-term obligations with the cash in hand?
With current liabilities at ₹132.74M, it appears that the company has been able to meet these commitments with a current assets level of ₹162.12M, leading to a 1.22x current account ratio. For Pharmaceuticals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does BETA face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, BETA is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether BETA is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BETA’s, case, the ratio of 7.92x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
BETA’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure BETA has company-specific issues impacting its capital structure decisions. You should continue to research Beta Drugs to get a better picture of the small-cap by looking at:
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