While small-cap stocks, such as Reds SA (ATH:KAMP) with its market cap of €47m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that KAMP is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into KAMP here.

How does KAMP’s operating cash flow stack up against its debt?

KAMP’s debt levels have fallen from €28m to €26m over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, KAMP’s cash and short-term investments stands at €751k , ready to deploy 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of KAMP’s operating efficiency ratios such as ROA here.

Can KAMP meet its short-term obligations with the cash in hand?

Looking at KAMP’s most recent €6m liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.91x.

Can KAMP service its debt comfortably?

With a debt-to-equity ratio of 28%, KAMP’s debt level may be seen as prudent. This range is considered safe as KAMP is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for KAMP, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

KAMP’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure KAMP has company-specific issues impacting its capital structure decisions. I recommend you continue to research Reds to get a better picture of the stock by looking at:

1. Valuation: What is KAMP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether KAMP is currently mispriced by the market.

2. Historical Performance: What has KAMP’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.

3. 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.