While small-cap stocks, such as Kazakhstan Potash Corporation Limited (ASX:KPC) with its market cap of AU$23.73M, 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 KPC is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into KPC here.

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

KPC’s debt levels surged from AU$19.63M to AU$33.40M over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, KPC currently has AU$4.82M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of KPC’s operating efficiency ratios such as ROA here.

Can KPC pay its short-term liabilities?

Looking at KPC’s most recent AU$26.97M 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 0.19x, which is below the prudent industry ratio of 3x.

Can KPC service its debt comfortably?

With debt at 35.09% of equity, KPC may be thought of as appropriately levered. KPC is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with KPC, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

KPC’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. 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 KPC has been performing in the past. I recommend you continue to research Kazakhstan Potash to get a more holistic view of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.