While small-cap stocks, such as Loulis Mills SA. (ATSE:KYLO) with its market cap of €37.66M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into KYLO here.
Does KYLO generate an acceptable amount of cash through operations?
KYLO’s debt levels have fallen from €36.18M to €34.27M over the last 12 months , which is made up of current and long term debt. With this debt repayment, KYLO’s cash and short-term investments stands at €6.09M , ready to deploy into the business. Additionally, KYLO has generated €4.87M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 14.22%, signalling that KYLO’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In KYLO’s case, it is able to generate 0.14x cash from its debt capital.
Can KYLO pay its short-term liabilities?
With current liabilities at €56.14M, it seems that the business has been able to meet these obligations given the level of current assets of €68.28M, with a current ratio of 1.22x. For Food 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.
Can KYLO service its debt comfortably?
With a debt-to-equity ratio of 43.70%, KYLO can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In KYLO’s case, the ratio of 2x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
At its current level of cash flow coverage, KYLO has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for KYLO’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Loulis Mills to get a more holistic view of the stock by looking at: