In This Article:
While small-cap stocks, such as Kesla Oyj (HEL:KELAS) with its market cap of €15m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into KELAS here.
How much cash does KELAS generate through its operations?
KELAS has shrunken its total debt levels in the last twelve months, from €15m to €12m , which comprises of short- and long-term debt. With this debt payback, KELAS currently has €549k remaining in cash and short-term investments , ready to deploy into the business. Moreover, KELAS has generated cash from operations of €3m in the last twelve months, leading to an operating cash to total debt ratio of 22%, indicating that KELAS’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In KELAS’s case, it is able to generate 0.22x cash from its debt capital.
Can KELAS meet its short-term obligations with the cash in hand?
With current liabilities at €15m, the company has been able to meet these commitments with a current assets level of €24m, leading to a 1.61x current account ratio. Generally, for Machinery companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can KELAS service its debt comfortably?
KELAS is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if KELAS’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For KELAS, the ratio of 5.31x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving KELAS ample headroom to grow its debt facilities.
Next Steps:
KELAS’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure KELAS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Kesla Oyj to get a better picture of the stock by looking at: