While small-cap stocks, such as Kalina Power Limited (ASX:KPO) with its market cap of AUD A$27.50M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since KPO is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into KPO here.
Does KPO generate enough cash through operations?
Over the past year, KPO has reduced its debt from A$4M to A$2M – this includes both the current and long-term debt. With this reduction in debt, KPO currently has A$4M remaining in cash and short-term investments for investing into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 assess some of KPO’s operating efficiency ratios such as ROA here.
Can KPO pay its short-term liabilities?
Looking at KPO’s most recent A$1M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of A$4M, with a current ratio of 3.84x. Though, anything about 3x may be excessive, since KPO may be leaving too much capital in low-earning investments.
Can KPO service its debt comfortably?
Since total debt levels have outpaced equities, KPO is a highly leveraged 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 KPO is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? KPO’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that its financial position may be different. I recommend keeping on top of market expectations for KPO’s future growth on our free analysis platform.
Are you a potential investor? With a high level of debt on its balance sheet, KPO could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for KPO to increase its operational efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. You should continue your analysis by taking a look at KPO’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.