Investors are always looking for growth in small-cap stocks like Kresta Holdings Limited (ASX:KRS), with a market cap of A$7.06M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the consumer durables industry facing headwinds from current disruption, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into KRS here.

Does KRS generate enough cash through operations?

KRS has shrunken its total debt levels in the last twelve months, from A$16.5M to A$13.3M , which comprises of short- and long-term debt. With this debt payback, KRS’s cash and short-term investments stands at A$9.0M for investing into the business. Additionally, KRS has produced cash from operations of A$4.4M over the same time period, leading to an operating cash to total debt ratio of 32.87%, meaning that KRS’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In KRS’s case, it is able to generate 0.33x cash from its debt capital.

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

Looking at KRS’s most recent A$26.4M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of A$24.4M, leading to a 0.93x current account ratio. which is under the appropriate industry ratio of 3x.

Does KRS face the risk of succumbing to its debt-load?

With debt reaching 68.37% of equity, KRS may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since KRS is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

Are you a shareholder? KRS’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. Furthermore, the company may struggle to meet its near term liabilities should an adverse event occur. Given that its financial position may change. I suggest researching market expectations for KRS’s future growth on our free analysis platform.

Are you a potential investor? KRS’s high debt levels along with poor cash coverage in addition to low liquidity coverage of short-term expenses may scare some investors away intially. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of KRS’s track record. As a following step, you should take a look at KRS’s past performance analysis on our free platform to conclude on KRS’s financial health.

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.