While small-cap stocks, such as XL Energy Limited (NSEI:XLENERGY) with its market cap of ₹35.30M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Semiconductor industry, in particular ones that run negative earnings, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into XLENERGY here.
How does XLENERGY’s operating cash flow stack up against its debt?
XLENERGY has sustained its debt level by about ₹9.02B over the last 12 months – this includes both the current and long-term debt. At this constant level of debt, XLENERGY’s cash and short-term investments stands at ₹19.84M for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of XLENERGY’s operating efficiency ratios such as ROA here.
Can XLENERGY pay its short-term liabilities?
Looking at XLENERGY’s most recent ₹8.95B liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.27x, which is below the prudent industry ratio of 3x.
Is XLENERGY’s debt level acceptable?
With total debt exceeding equities, XLENERGY is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since XLENERGY is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
XLENERGY’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 lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how XLENERGY has been performing in the past. I suggest you continue to research XL Energy to get a more holistic view of the stock by looking at:
- Historical Performance: What has XLENERGY’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.